As filed with the Securities and Exchange Commission on July 13, 2004
Securities Act File No. 333-
Investment Company Act File No. 811-06570
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. [ ]
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 7 [X]
(Check appropriate box or boxes)
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MUNIYIELD NEW JERSEY FUND, INC.
(Exact Name of Registrant as Specified in Charter)
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800 Scudders Mill Road, Plainsboro, New Jersey 08536
(Address of Principal Executive Offices)
(Registrant's Telephone Number, Including Area Code) (609) 282-2800
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Terry K. Glenn
MuniYield New Jersey Fund, Inc.
800 Scudders Mill Road, Plainsboro, New Jersey 08536
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
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Copies to:
Andrew J. Donohue, Esq. Frank P. Bruno, Esq.
FUND ASSET MANAGEMENT, L.P. SIDLEY AUSTIN BROWN & WOOD LLP
P.O. Box 9011 787 Seventh Avenue
Princeton, New Jersey 08543-9011 New York, New York 10019-6018
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Approximate date of proposed public offering: As soon as practicable
after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, as amended (the "Securities Act"), other than securities offered only
in connection with dividend or interest reinvestment plans, check the
following box. [_]
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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Proposed Maximum
Title of Securities Amount being Proposed Maximum Aggregate Offering Amount of
Being Registered Registered (1) Offering Price Per Unit (1) Price (1) Registration Fee (2)
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Auction Market Preferred Stock....... 1,100 shares $25,000 $27,500,000 $3,485
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Transmitted prior to the filing date to the designated lockbox of the
Securities and Exchange Commission at Mellon Bank in Pittsburgh, PA.
The Registrant hereby amends this Registration Statement on such date or
dates as may become necessary to delay its effective date until the Registrant
shall file a further amendment, which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion
Preliminary Prospectus dated July 13, 2004
PROSPECTUS
$27,500,000
MuniYield New Jersey Fund, Inc.
Auction Market Preferred Stock ("AMPS")
1,100 Shares, Series C
Liquidation Preference $25,000 Per Share
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MuniYield New Jersey Fund, Inc. is a non-diversified, closed-end fund.
The investment objective of the Fund is to provide shareholders with as high a
level of current income exempt from Federal income taxes and New Jersey
personal income tax as is consistent with its investment policies and prudent
investment management. The Fund seeks to achieve its investment objective by
investing, as a fundamental policy, at least 80% of an aggregate of the Fund's
net assets (including proceeds from the issuance of any preferred stock) and
the proceeds of any borrowings for investment purposes, in a portfolio of
municipal obligations the interest on which, in the opinion of bond counsel to
the issuer, is excludable from gross income for Federal income tax purposes
(except that the interest may be includable in taxable income for purposes of
the Federal alternative minimum tax) and exempt from New Jersey personal
income tax. Under normal market conditions, the Fund invests primarily in long
term municipal obligations that are rated investment grade or, if unrated, are
considered by the Fund's investment adviser to be of comparable quality. The
Fund may invest in certain tax exempt securities classified as "private
activity bonds," as discussed within, that may subject certain investors in
the Fund to an alternative minimum tax. There can be no assurance that the
Fund's investment objective will be realized.
This prospectus contains information you should know before investing,
including information about risks. Please read it before you invest and keep
it for future reference. The Fund's statement of additional information, dated
, 2004, contains further information about the Fund and is
incorporated by reference (legally considered to be part of this prospectus)
and the table of contents of the statement of additional information appears
on page 47 of this prospectus. You may request a free copy by writing or
calling the Fund at (800) 543-6217.
Certain capitalized terms used herein not otherwise defined in this
prospectus have the meaning provided in the Glossary at the back of this
prospectus.
Investing in the AMPS involves certain risks that are described in the
"Risk Factors and Special Considerations" section beginning on page 7 of this
prospectus. The minimum purchase amount for the AMPS is $25,000.
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Per Share Total
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Public offering price.................................. $25,000 $27,500,000
Underwriting discount.................................. $250 $275,000
Proceeds, before expenses, to the Fund (1) $24,750 $27,225,000
(1) The estimated offering expenses payable by the Fund are $135,000.
The public offering price per share will be increased by the amount of
accumulated dividends, if any, from the date the shares are first issued.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
One certificate for the Series C AMPS will be ready for delivery to the
nominee of The Depository Trust Company on or about , 2004.
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Merrill Lynch & Co.
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The date of this prospectus is , 2004.
TABLE OF CONTENTS
Page
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PROSPECTUS SUMMARY................................................................................................3
RISK FACTORS AND SPECIAL CONSIDERATIONS...........................................................................7
FINANCIAL HIGHLIGHTS.............................................................................................11
THE FUND.........................................................................................................12
USE OF PROCEEDS..................................................................................................12
CAPITALIZATION...................................................................................................13
PORTFOLIO COMPOSITION............................................................................................13
INVESTMENT OBJECTIVE AND POLICIES................................................................................13
OTHER INVESTMENT POLICIES........................................................................................22
DESCRIPTION OF AMPS..............................................................................................25
THE AUCTION......................................................................................................30
RATING AGENCY GUIDELINES.........................................................................................38
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS..................................................................39
TAXES............................................................................................................40
DESCRIPTION OF CAPITAL STOCK.....................................................................................42
CUSTODIAN........................................................................................................44
UNDERWRITING.....................................................................................................45
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR..........................................................45
ACCOUNTING SERVICES PROVIDER.....................................................................................45
LEGAL OPINIONS...................................................................................................46
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND EXPERTS........................................................46
ADDITIONAL INFORMATION...........................................................................................46
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION.........................................................47
GLOSSARY.........................................................................................................48
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Information about the Fund can be reviewed and copied at the SEC's Public
Reference Room in Washington, D.C. Call 1-202-942-8090 for information on the
operation of the public reference room. This information is also available on
the SEC's Internet site at http://www.sec.gov and copies may be obtained upon
payment of a duplicating fee by writing to the Public Reference Section of the
SEC, Washington, D.C. 20549-0102.
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You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to
provide you with different information. If anyone provides you with different
or inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date
on the front cover of this prospectus. Our business, financial condition,
results of operations and prospects may have changed since that date.
2
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PROSPECTUS SUMMARY
This summary is qualified in its entirety by reference to the detailed
information included in this prospectus and the statement of additional
information.
The Fund MuniYield New Jersey Fund, Inc. is a non-diversified,
closed-end management investment company.
The Offering The Fund is offering a total of 1,100 shares of
Auction Market Preferred Stock, Series C, at a
purchase price of $25,000 per share plus accumulated
dividends, if any, from the date the shares are first
issued. The shares of AMPS are being offered by
Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), as underwriter.
The Series C AMPS will be shares of preferred stock
of the Fund that entitle their holders to receive
cash dividends at an annual rate that may vary for
the successive dividend periods. In general, except
as described below, each dividend period for the
Series C AMPS following the initial dividend period
will be seven days. The applicable dividend for a
particular dividend period will be determined by an
auction conducted on the business day next preceding
the start of that dividend period.
Investors and potential investors in shares of Series
C AMPS may participate in auctions for the AMPS
through their broker-dealers.
Generally, AMPS investors will not receive
certificates representing ownership of their shares.
Ownership of AMPS will be maintained in book-entry
form by the securities depository (The Depository
Trust Company) or its nominee for the account of the
investor's agent member (generally the investor's
broker-dealer). The investor's agent member, in turn,
will maintain records of such investor's beneficial
ownership of AMPS.
Investment Objective The investment objective of the Fund is to provide
and Policies shareholders with as high a level of current income
exempt from Federal income taxes and New Jersey
personal income tax as is consistent with its
investment policies and prudent investment
management. The Fund seeks to achieve its investment
objective by investing, as a fundamental policy, at
least 80% of an aggregate of the Fund's net assets
(including proceeds from the issuance of any
preferred stock) and the proceeds of any borrowings
for investment purposes, in a portfolio of municipal
obligations issued by or on behalf of the State of
New Jersey, its political subdivisions, agencies and
instrumentalities and by other qualifying issuers,
each of which pays interest that, in the opinion of
bond counsel to the issuer, is excludable from gross
income for Federal income tax purposes (except that
the interest may be includable in taxable income for
purposes of the Federal alternative minimum tax) and
exempt from New Jersey personal income tax ("New
Jersey Municipal Bonds"). The Fund also may invest in
municipal obligations issued by or on behalf of
states, territories and possessions of the United
States and their political subdivisions, agencies or
instrumentalities, each of which pays interest that,
in the opinion of bond counsel to the issuer, is
excludable from gross income for Federal income tax
purposes but is not exempt from gross income for New
Jersey personal income tax purposes ("Municipal
Bonds"). In general, the Fund does not intend for its
investments to earn a large amount of interest income
that is not exempt from Federal income tax (except
that the interest may be includable in taxable income
for purposes of the Federal alternative minimum tax)
or New Jersey personal income tax. There can be no
assurance that the Fund's investment objective will
be realized.
Investment Grade Municipal Bonds. Under normal market
conditions, the Fund invests primarily in a portfolio
of long term New Jersey Municipal Bonds and Municipal
Bonds that are rated investment grade by one or more
nationally recognized statistical rating
organizations ("NRSROs") or in unrated bonds
considered by Fund Asset Management,
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3
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L.P., the Fund's investment adviser (the "Investment
Adviser"), to be of comparable quality.
Indexed and Inverse Floating Rate Securities. The
Fund may invest in securities whose potential returns
are directly related to changes in an underlying
index or interest rate, known as indexed securities.
The return on indexed securities will rise when the
underlying index or interest rate rises and fall when
the index or interest rate falls. The Fund may also
invest in securities whose return is inversely
related to changes in an interest rate (inverse
floaters). In general, income on inverse floaters
will decrease when short term interest rates increase
and increase when short term interest rates decrease.
Investments in inverse floaters may subject the Fund
to the risks of reduced or eliminated interest
payments and loss of principal. In addition, certain
indexed securities and inverse floaters may increase
or decrease in value at a greater rate than the
underlying interest rate, which effectively leverages
the Fund's investment. As a result, the market value
of such securities will generally be more volatile
than that of fixed rate, tax exempt securities. Both
indexed securities and inverse floaters are
derivative securities and can be considered
speculative.
Hedging Transactions. The Fund may seek to hedge its
portfolio against changes in interest rates using
options and financial futures contracts or swap
transactions. The Fund's hedging transactions are
designed to reduce volatility, but come at some cost.
For example, the Fund may try to limit its risk of
loss from a decline in price of a portfolio security
by purchasing a put option. However, the Fund must
pay for the option, and the price of the security may
not in fact drop. In large part, the success of the
Fund's hedging activities depends on its ability to
forecast movements in securities prices and interest
rates. The Fund is not required to hedge its
portfolio and may choose not to do so. The Fund
cannot guarantee that any hedging strategies it uses
will work.
Swap Agreements. The Fund is authorized to enter into
swap agreements, which are over-the-counter contracts
in which one party agrees to make periodic payments
based on the change in the market value of a specific
bond, basket of bonds or index in return for periodic
payments based on a fixed or variable interest rate
or the change in market value of a different bond,
basket of bonds or index. Swap agreements may be used
to obtain exposure to a bond or market without owning
or taking physical custody of securities.
Tax Considerations. While exempt interest
distributions derived from interest or gains on New
Jersey Municipal Bonds are excluded from gross income
for Federal income tax and New Jersey personal income
tax purposes (if certain requirements are met), they
may be subject to the Federal alternative minimum tax
in certain circumstances. Distributions of any
capital gain or other taxable income will be taxable
to stockholders. The Fund may not be a suitable
investment for investors subject to the Federal
alternative minimum tax or who would become subject
to such tax by investing in the Fund. See "Taxes."
Investment Adviser The Investment Adviser provides investment advisory
and administrative services to the Fund. For its
services, the Fund pays the Investment Adviser a
monthly fee at the annual rate of 0.50% of the Fund's
average weekly net assets (including any proceeds
from the issuance of preferred stock).
Dividends and Dividends on the Series C AMPS will be cumulative
Dividend Periods from the date the shares are first issued and payable
at the annualized cash dividend rate for the initial
dividend period on the initial dividend payment date
as follows:
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4
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Initial Initial
Initial Dividend Dividend
Dividend Period Payment
AMPS Series Rate Ending Date
-------------------------------- ------------ ---------------------------- ---------------------------
Series C.................. % , 2004 , 2004
After the initial dividend period, each dividend
period for the Series C AMPS will generally consist
of seven days; provided however, that, before any
auction, the Fund may decide, subject to certain
limitations and only if it gives notice to holders,
to declare a special dividend period of up to five
years.
After the initial dividend period, in the case of
dividend periods that are not special dividend
periods, dividends generally will be payable on each
succeeding Tuesday in the case of the Series C AMPS.
Dividends for the Series C AMPS will be paid through
the securities depository (The Depository Trust
Company) on each dividend payment date for the AMPS.
For each subsequent dividend period, the auction
agent (The Bank of New York) will hold an auction to
determine the cash dividend rate on the shares of
Series C AMPS.
Determination of Generally, the applicable dividend rate for any
Maximum Dividend dividend period for the Series C AMPS will not be
Rates more than the maximum applicable rate attributable to
such shares. The maximum applicable rate will be the
higher of (A) the applicable percentage of the
reference rate on the auction date or (B) the
applicable spread plus the reference rate on the
auction date. The reference rate is (A) the higher of
the applicable LIBOR Rate (as defined in the
Glossary) and the Taxable Equivalent of the Short
Term Municipal Bond Rate (as defined in the Glossary)
(for a dividend period or special dividend period of
364 or fewer days), or (B) the applicable Treasury
Index Rate (as defined in the Glossary) (for a
special dividend period of 365 days or more). The
maximum applicable rate for the Series C AMPS will
depend on the credit rating assigned to the shares,
the length of the dividend period and whether or not
the Fund has given notification prior to the auction
for the dividend period that any taxable income will
be included in the dividend on the AMPS for that
dividend period. The applicable percentage and
applicable spread are as follows:
Applicable Applicable Applicable Applicable
Credit Ratings Percentage Percentage Spread Over Spread Over
------------------------------------------------
of Reference of Reference Reference Reference
Rate--No Rate-- Rate--No Rate--
Moody's S&P Notification Notification Notification Notification
---------------------- ------------------------ ---------------- ---------------- ---------------- ----------------
Aaa AAA 110% 125% 1.10% 1.25%
Aa3 to Aa1 AA- to AA+ 125% 150% 1.25% 1.50%
A3 to A1 A- to A+ 150% 200% 1.50% 2.00%
Baa3 to Baa1 BBB- to BBB+ 175% 250% 1.75% 2.50%
Below Baa3 Below BBB- 200% 300% 2.00% 3.00%
The applicable percentage and the applicable spread
as so determined may be subject to upward but not
downward adjustment in the discretion of the Board of
Directors of the Fund after consultation with the
broker-dealers participating in the auction for the
AMPS.
There is no minimum applicable dividend rate for any
dividend period.
Other AMPS The Fund has outstanding 3,900 shares of two other
series of Auction Market Preferred Stock, each with a
liquidation preference of $25,000 per share, plus
accumulated but
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5
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unpaid dividends, for an aggregate initial
liquidation preference of $97,500,000 (the "Other
AMPS"). The Other AMPS are as follows: 2,400 shares
of Auction Market Preferred Stock, Series A; and
1,500 shares of Auction Market Preferred Stock,
Series B. The Series C AMPS offered hereby rank on a
parity with the Other AMPS with respect to dividends
and liquidation preference.
Asset Maintenance Under the Fund's Articles Supplementary creating the
Series C AMPS (the "Articles Supplementary"), the
Fund must maintain:
o asset coverage of the AMPS and Other AMPS as
required by the rating agencies rating the AMPS,
and
o asset coverage of the AMPS and Other AMPS of at
least 200% as required by the Investment Company
Act of 1940 (the "1940 Act").
The Fund estimates that, based on the composition of
its portfolio at May 31, 2004, asset coverage of the
AMPS and Other AMPS as required by the 1940 Act would
be approximately [ ]% immediately after the Fund
issues the shares of AMPS offered by this prospectus
representing approximately [ ]% of the Fund's
capital, or approximately [ ]% of the Fund's common
stock equity, immediately after the issuance of such
AMPS.
Mandatory If the required asset coverage is not maintained or,
Redemption when necessary, restored, the Fund must redeem shares
of AMPS at the price of $25,000 per share plus
accumulated but unpaid dividends thereon (whether or
not earned or declared). The provisions of the 1940
Act may restrict the Fund's ability to make such a
mandatory redemption.
Optional Redemption The Fund may, at its option, choose to redeem all or
a portion of the shares of AMPS on any dividend
payment date at the price of $25,000 per share, plus
accumulated but unpaid dividends thereon (whether or
not earned or declared), plus any applicable premium.
Liquidation The liquidation preference (that is, the amount the
Preference Fund must pay to holders of AMPS if the Fund is
liquidated) of each share of AMPS will be $25,000,
plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared).
Ratings The AMPS will be issued with a rating of Aaa from
Moody's Investors Service, Inc. ("Moody's") and AAA
from Standard & Poor's ("S&P").
Voting Rights The 1940 Act requires that the holders of AMPS and
any other preferred stock, including the Other AMPS,
voting as a separate class, have the right to elect
at least two directors at all times and to elect a
majority of the directors at any time when dividends
on the AMPS or any other preferred stock, including
the Other AMPS, are unpaid for two full years. The
Fund's Charter, the 1940 Act and the General
Corporation Laws of the State of Maryland require
holders of AMPS and any other preferred stock,
including the Other AMPS, to vote as a separate class
on certain other matters.
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RISK FACTORS AND SPECIAL CONSIDERATIONS
An investment in the Fund's AMPS should not constitute a complete
investment program.
Investment Considerations. Investors in AMPS should consider the
following factors:
o The credit ratings of the AMPS could be reduced or terminated while
an investor holds the AMPS.
o Neither broker-dealers nor the Fund are obligated to purchase shares
of AMPS in an auction or otherwise, nor is the Fund required to
redeem shares of AMPS in the event of a failed auction.
o If sufficient bids do not exist in an auction, the applicable
dividend rate will be the maximum applicable dividend rate, and in
such event, owners of AMPS wishing to sell will not be able to sell
all, and may not be able to sell any, AMPS in the auction. As a
result, investors may not have liquidity of investment.
o Broker-dealers may submit orders in auctions for the AMPS for their
own account. If a broker-dealer submits an order for its own account
in any auction, it may have knowledge of orders placed through it in
that auction and therefore have an advantage over other bidders, but
such broker-dealer would not have knowledge of orders submitted by
other broker-dealers in that auction.
Secondary Market. The broker-dealers intend to maintain a secondary
trading market in the AMPS outside of auctions; however, they have no
obligation to do so and there can be no assurance that a secondary market for
the AMPS will develop or, if it does develop, that it will provide holders
with a liquid trading market. The AMPS will not be registered on any stock
exchange or on any automated quotation system. An increase in the level of
interest rates likely will have an adverse effect on the secondary market
price of the AMPS, and a selling stockholder may have to sell AMPS between
auctions at a price per share of less than $25,000.
Rating Agencies. The Fund will issue the AMPS only if the AMPS have
received a rating of Aaa from Moody's and AAA from S&P. As a result of such
ratings the Fund will be subject to guidelines of Moody's, S&P or another
substitute NRSRO that may issue ratings for its preferred stock. These
guidelines may impose asset coverage or portfolio composition requirements
that are more stringent than those imposed by the 1940 Act and may prohibit or
limit the use by the Fund of certain portfolio management techniques or
investments. The Fund does not expect these guidelines to prevent the
Investment Adviser from managing the Fund's portfolio in accordance with the
Fund's investment objective and policies. Also, under certain circumstances,
the Fund may voluntarily terminate compliance with Moody's or S&P's
guidelines, or both, in which case the AMPS may no longer be rated by Moody's
or S&P, as applicable, but will be rated by at least one rating agency.
New Jersey Municipal Bonds. The Fund is more exposed to risks affecting
issuers of New Jersey Municipal Bonds than in a municipal bond fund that
invests more widely. Economic forecasts as of October 2003 for the national
and New Jersey economies project a modest economic recovery in the fourth
quarter of 2003 and in 2004. New Jersey and the nation may experience further
near-term slow growth and the expected recovery may stall into early 2004 if
consumers, investors, and businesses become more cautious than currently
assumed. The fundamentals of New Jersey's economic health, however, remain
stable, and the long run prospects for economic growth in New Jersey in 2004
and beyond are favorable. Currently, the State of New Jersey's general
obligation bonds are rated AA by S&P, Aa2 by Moody's and AA by Fitch Ratings.
Additionally, on March 10, 2004, Moody's placed New Jersey's general
obligation bonds on a rating watch for possible downgrade.
Interest Rate Risk and AMPS. The Fund issues shares of AMPS, which
generally pay dividends based on short term interest rates. The Fund generally
will purchase New Jersey Municipal Bonds and Municipal Bonds that pay interest
at fixed or adjustable rates. If short term interest rates rise, dividend
rates on the shares of AMPS may rise so that the amount of dividends paid to
the holders of shares of AMPS exceeds the income from the Fund's portfolio
securities. Because income from the Fund's entire investment portfolio (not
just the portion of the portfolio purchased with the proceeds of the AMPS
offering) is available to pay dividends on the shares of AMPS, dividend rates
on the shares of AMPS would need to greatly exceed the Fund's net portfolio
income before the Fund's ability
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7
to pay dividends on the shares of AMPS would be jeopardized. If market
interest rates rise, this could negatively impact the value of the Fund's
investment portfolio, reducing the amount of assets serving as asset coverage
for the AMPS.
Non-Diversification. The Fund is registered as a "non-diversified"
investment company. This means that the Fund may invest a greater percentage
of its assets in a single issuer than a diversified investment company. Since
the Fund may invest a relatively high percentage of its assets in a limited
number of issuers, the Fund may be more exposed to any single economic,
political or regulatory occurrence than a more widely-diversified fund. Even
as a non-diversified fund, the Fund must still meet the diversification
requirements applicable to regulated investment companies under the Federal
income tax laws.
Market Risk and Selection Risk. Market risk is the risk that the bond
market will go down in value, including the possibility that the market will
go down sharply and unpredictably. Selection risk is the risk that the
securities that Fund management selects will underperform the bond market, the
relevant indices, or other funds with similar investment objectives and
investment strategies.
Tax Exempt Securities Market Risk. The amount of public information
available about New Jersey Municipal Bonds and Municipal Bonds in the Fund's
portfolio is generally less than that for corporate equities or bonds, and the
investment performance of the Fund may, therefore, be more dependent on the
analytical abilities of the Investment Adviser than the performance of a stock
fund or taxable bond fund.
Interest Rate and Credit Risk. The Fund invests in New Jersey Municipal
Bonds and Municipal Bonds, which are subject to interest rate and credit risk.
Interest rate risk is the risk that prices of New Jersey Municipal Bonds and
Municipal Bonds generally increase when interest rates decline and decrease
when interest rates increase. Prices of longer term securities generally
change more in response to interest rate changes than prices of shorter term
securities. The Fund's use of leverage by the issuance of preferred stock and
its investment in inverse floating obligations, as discussed below, may
increase interest rate risk. Because market interest rates are currently near
their lowest levels in many years, there is a greater risk that the Fund's
portfolio will decline in value if interest rates increase in the future.
Credit risk is the risk that the issuer will be unable to pay the interest or
principal when due. Changes in an issuer's credit rating or the market's
perception of an issuer's creditworthiness may affect the value of the Fund's
investment in that issuer. The degree of credit risk depends on both the
financial condition of the issuer and the terms of the obligation.
Call and Redemption Risk. A New Jersey Municipal Bond's or Municipal
Bond's issuer may call the bond for redemption before it matures. If this
happens to a New Jersey Municipal Bond or Municipal Bond that the Fund holds,
the Fund may lose income and may have to invest the proceeds in New Jersey
Municipal Bonds or Municipal Bonds with lower yields.
Rating Categories. The Fund intends to invest in New Jersey Municipal
Bonds and Municipal Bonds that are rated investment grade by S&P, Moody's or
Fitch Ratings, or in unrated New Jersey Municipal Bonds and Municipal Bonds
that are considered by the Investment Adviser to possess similar credit
characteristics. Obligations rated in the lowest investment grade category may
have certain speculative characteristics. For example, their prices are more
volatile, economic downturns and financial setbacks may affect their prices
more negatively, and their trading market may be more limited.
Reinvestment Risk. Reinvestment risk is the risk that income from the
Fund's portfolio will decline if and when the Fund invests the proceeds from
matured, traded or called bonds at market interest rates that are below the
portfolio's current earnings rate. A decline in income could negatively affect
the Fund's yield, return or the market price of the common stock.
Private Activity Bonds. The Fund may invest in certain tax exempt
securities classified as "private activity bonds." These bonds may subject
certain investors in the Fund to the Federal alternative minimum tax.
Liquidity of Investments. Certain New Jersey Municipal Bonds and
Municipal Bonds in which the Fund invests may lack an established secondary
trading market or may be otherwise considered illiquid. Liquidity of a
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8
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security relates to the ability to easily dispose of the security and the
price to be obtained and does not generally relate to the credit risk or
likelihood of receipt of cash at maturity. Illiquid securities may trade at a
discount from comparable, more liquid investments.
Portfolio Strategies. The Fund may engage in various portfolio strategies
both to seek to increase the return of the Fund and to seek to hedge its
portfolio against adverse effects from movements in interest rates and in the
securities markets. These portfolio strategies include the use of derivatives,
such as indexed securities, inverse floating rate securities, options,
futures, options on futures, interest rate swap transactions and credit
default swaps. Such strategies subject the Fund to the risk that, if the
Investment Adviser incorrectly forecasts market values, interest rates or
other applicable factors, the Fund's performance could suffer. Certain of
these strategies, such as investments in inverse floating rate securities and
credit default swaps, may provide investment leverage to the Fund's portfolio.
The Fund is not required to use derivatives or other portfolio strategies to
seek to increase return or to seek to hedge its portfolio and may choose not
to do so. There can be no assurance that the Fund's portfolio strategies will
be effective. Some of the derivative strategies that the Fund may use to seek
to increase its return are riskier than its hedging transactions and have
speculative characteristics. Such strategies do not attempt to limit the
Fund's risk of loss.
General Risks Related to Derivatives. Derivatives are financial contracts
or instruments whose value depends on, or is derived from, the value of an
underlying asset, reference rate or index (or relationship between two
indices). The Fund may invest in a variety of derivative instruments for
investment purposes, hedging purposes or to seek to increase its return, such
as options, futures contracts and swap agreements. The Fund may use
derivatives as a substitute for taking a position in an underlying security or
other asset and/or as part of a strategy designed to reduce exposure to other
risks, such as interest rate risk. The Fund also may use derivatives to add
leverage to the portfolio and/or to hedge against increases in the Fund's
costs associated with the dividend payments on the preferred stock, including
the AMPS. The Fund also may invest in certain derivative products that pay tax
exempt income interest via a trust or partnership through which the Fund holds
interests in one or more underlying long term municipal securities. The Fund's
use of derivative instruments involves risks different from, and possibly
greater than, the risks associated with investing directly in securities and
other traditional investments. Derivatives are subject to a number of risks
such as liquidity risk, interest rate risk, credit risk, leverage risk, the
risk of ambiguous documentation and management risk. They also involve the
risk of mispricing or improper valuation and correlation risk (i.e., the risk
that changes in the value of the derivative may not correlate perfectly with
the underlying asset, rate or index). If the Fund invests in a derivative
instrument it could lose more than the principal amount invested. Moreover,
derivatives raise certain tax, legal, regulatory and accounting issues that
may not be presented by investments in New Jersey Municipal Bonds and
Municipal Bonds, and there is some risk that certain issues could be resolved
in a manner that could adversely impact the performance of the Fund and/or the
tax exempt nature of the dividends paid by the Fund.
Also, suitable derivative transactions may not be available in all
circumstances and there can be no assurance that the Fund will engage in these
transactions to reduce exposure to other risks when that would be beneficial.
Swaps. Swap agreements are types of derivatives. In order to seek to
hedge the value of the Fund's portfolio, to hedge against increases in the
Fund's cost associated with the interest payments on its outstanding
borrowings or to seek to increase the Fund's return, the Fund may enter into
interest rate, credit default or total return swap transactions. In interest
rate swap transactions, there is a risk that yields will move in the direction
opposite of the direction anticipated by the Fund, which would cause the Fund
to make payments to its counterparty in the transaction that could adversely
affect Fund performance. In addition to the risks applicable to swaps
generally, credit default swap transactions involve special risks because they
are difficult to value, are highly susceptible to liquidity and credit risk,
and generally pay a return to the party that has paid the premium only in the
event of an actual default by the issuer of the underlying obligation (as
opposed to a credit downgrade or other indication of financial difficulty).
Total return swap transactions involve the risks that the counterparty will
default on its payment obligation to the Fund in the transaction and that the
Fund will not be able to meet its obligation to the counterparty in the
transaction. The Fund is not required to enter into interest rate, credit
default or total return swap transactions for hedging purposes or to enhance
its return and may choose not to do so.
------------------------------------------------------------------------------
9
------------------------------------------------------------------------------
Taxability Risk. The Fund intends to minimize the payment of taxable
income to stockholders by investing in New Jersey Municipal Bonds, Municipal
Bonds and other tax exempt securities in reliance on an opinion of bond
counsel to the issuer that the interest paid on those securities will be
excludable from gross income for Federal income tax purposes and exempt from
New Jersey personal income tax. Such securities, however, may be determined
for Federal income tax purposes to pay, or to have paid, taxable income
subsequent to the Fund's acquisition of the securities. In that event, the
Internal Revenue Service may demand that the Fund pay taxes on the affected
interest income, and, if the Fund agrees to do so, the Fund's yield on its
common stock could be adversely affected. A determination that interest on a
security held by the Fund is includable in gross income for Federal income tax
purposes retroactively to its date of issue may, likewise, cause a portion of
prior distributions received by stockholders, including holders of AMPS, to be
taxable to those stockholders in the year of receipt. The Fund will not pay an
Additional Dividend (as defined herein) to a holder of AMPS under these
circumstances. If a security acquired based on reliance on such an opinion of
counsel is subsequently determined to pay interest that is includable in gross
income for Federal income tax purposes, the Fund will dispose of that security
as soon as reasonably practicable.
Antitakeover Provisions. The Fund's Charter, By-laws and the General
Corporation Law of the State of Maryland include provisions that could limit
the ability of other entities or persons to acquire control of the Fund or to
change the composition of its Board of Directors. Such provisions could limit
the ability of stockholders to sell their shares at a premium over prevailing
market prices by discouraging a third party from seeking to obtain control of
the Fund.
Market Disruption. The terrorist attacks in the United States on
September 11, 2001 had a disruptive effect on the securities markets, some of
which were closed for a four-day period. The continued threat of similar
attacks, and related events, including U.S. military actions in Iraq and
continued unrest in the Middle East, have led to increased short term market
volatility and may have long term effects on U.S. and world economies and
markets. Similar disruptions of the financial markets could adversely affect
the market prices of the Fund's portfolio securities, interest rates,
auctions, secondary trading, ratings, credit risk, inflation and other factors
relating to the Fund's AMPS.
------------------------------------------------------------------------------
10
FINANCIAL HIGHLIGHTS
The following Financial Highlights table is intended to help you
understand the Fund's financial performance for the periods shown. Certain
information reflects financial results for a single share of common stock or
preferred stock of the Fund. The total returns in the table represent the rate
an investor would have earned or lost on an investment in shares of common
stock of the Fund (assuming reinvestment of all dividends). The information
with respect to the fiscal years ended November 30, 1994 to November 30, 2003
has been audited by _______________ whose report for the fiscal year ended
November 30, 2003, along with the financial statements of the Fund, is
included in the Fund's 2003 Annual Report, which is incorporated by reference
herein. The information with respect to the six months ended May 31, 2004 is
unaudited and is included in the Fund's 2004 Semi-Annual Report, which is
incorporated by reference herein. You may obtain a copy of the 2003 Annual
Report and the 2004 Semi-Annual Report at no cost by calling (800) 543-6217
between 8:30 a.m. and 5:30 p.m. Eastern time on any business day.
The following per share data and ratios have been derived from
information provided in the financial statements.
For the Six
Months
Ended
May 31, For the Year Ended November 30,
-------------------------------------------------------------
2004
(unaudited) 2003 2002 2001++ 2000++
--------------------- ------------- ------------- ---------------- ----------------
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance
Net asset value, beginning of period $ $ 14.84 $ 14.78 $ 13.99 $ 13.60
--------------------- ------------- ------------- ---------------- ----------------
Investment income-- net ++ 1.05++ 1.06 1.08 1.01
Realized and unrealized gain (loss)
on investments-- net .52 .05 .78 .45
Dividends and distributions to
Preferred Stock shareholders:
Investment income-- net (.06) (.09) (.20) (.26)
Realized gain on investments-- net -- -- --+ -- --
In excess of realized gain on
investments-- net -- -- -- -- --
--------------------- ------------- ------------- ---------------- ----------------
Total from investment operations 1.51 1.02 1.66 1.20
--------------------- ------------- ------------- ---------------- ----------------
Less dividends and distributions to
Common Stock shareholders:
Investment income-- net ( ) (.96) (.96) (.87) (.81)
Realized gain on investments-- net -- -- --+ -- --
In excess of realized gain on
investments-- net -- -- -- -- --
--------------------- ------------- ------------- ---------------- ----------------
Total dividends and distributions to
Common Stock shareholders: ( ) (.96) (.96) (.87) (.81)
--------------------- ------------- ------------- ---------------- ----------------
Effect of Preferred Stock
activity:++++
Dividends and distributions to
Preferred Stock shareholders:
Investment income-- net -- -- -- -- --
Realized gain on investments-- -- -- -- -- --
net
--------------------- ------------- ------------- ---------------- ----------------
Total effect of Preferred Stock -- -- -- -- --
activity
--------------------- ------------- ------------- ---------------- ----------------
Net asset value, end of period $ $15.39 $14.84 $14.78 $13.99
===================== ============= ============= ================ ================
Market price per share, end of period $ $14.34 $14.07 $14.41 $12.8125
===================== ============= ============= ================ ================
Total Investment Return*
Based on market price per share ( )%## 8.90% 4.27% 19.45% 11.55%
===================== ============= ============= ================ ================
Based on net asset value per share %## 10.81% 7.22% 12.20% 9.71%
===================== ============= ============= ================ ================
Ratios Based on Average Net
Assets of Common Stock
Total expenses, net of reimbursement
and excluding reorganization
expenses** %# 1.02% 1.05% 1.06% 1.10%
===================== ============= ============= ================ ================
Total expenses, excluding
reorganization expenses** 1.02% 1.05% 1.06% 1.10%
===================== ============= ============= ================ ================
Total expenses** %# 1.02% 1.05% 1.06% 1.10%
===================== ============= ============= ================ ================
Total investment income-- net** %# 6.94% 7.06% 7.26% 7.59%
===================== ============= ============= ================ ================
Amount of dividends to Preferred
Stock shareholders %# .40% .58% 1.33% 1.91%
===================== ============= ============= ================ ================
[TABLE CONTINUED]
For the Year Ended November 30,
-----------------------------------------------------------------------------
1999++ 1998 1997 1996
---------------- ------------------ -------------------- ------------------
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance
Net asset value, beginning of period $ 15.93 $ 15.51 $ 15.46 $ 15.56
---------------- ------------------ -------------------- ------------------
Investment income-- net 1.06 1.13 1.14 1.14
Realized and unrealized gain (loss)
on investments-- net (1.98) .42 .05 (.10)
Dividends and distributions to
Preferred Stock shareholders:
Investment income-- net (.19) -- -- --
Realized gain on investments-- net -- -- -- --
In excess of realized gain on
investments-- net (.04) -- -- --
---------------- ------------------ -------------------- ------------------
Total from investment operations (1.15) 1.55 1.19 1.04
---------------- ------------------ -------------------- ------------------
Less dividends and distributions to
Common Stock shareholders:
Investment income-- net (.87) (.89) (.91) (.91)
Realized gain on investments-- net -- -- -- --
In excess of realized gain on
investments-- net (.31) -- -- --
---------------- ------------------ -------------------- ------------------
Total dividends and distributions to
Common Stock shareholders: (1.18) (.89) (.91) (.91)
---------------- ------------------ -------------------- ------------------
Effect of Preferred Stock
activity:++++
Dividends and distributions to
Preferred Stock shareholders:
Investment income-- net -- (.21) (.23) (.23)
Realized gain on investments-- -- (.03) -- --
net
---------------- ------------------ -------------------- ------------------
Total effect of Preferred Stock -- (.24) (.23) (.23)
activity
---------------- ------------------ -------------------- ------------------
Net asset value, end of period $13.60 $15.93 $15.51 $15.46
================ ================== ==================== ==================
Market price per share, end of period $12.25 $16.75 $15.5625 $14.50
================ ================== ==================== ==================
Total Investment Return*
Based on market price per share (20.75%) 13.89% 13.96% 12.34%
================ ================== ==================== ==================
Based on net asset value per share (7.48%) 8.68% 6.52% 5.84%
================ ================== ==================== ==================
Ratios Based on Average Net
Assets of Common Stock
Total expenses, net of reimbursement
and excluding reorganization
expenses** 1.05% -- -- --
================ ================== ==================== ==================
Total expenses, excluding
reorganization expenses** 1.05%
================ ================== ==================== ==================
Total expenses** 1.05% -- -- --
================ ================== ==================== ==================
Total investment income-- net** 7.16% -- -- --
================ ================== ==================== ==================
Amount of dividends to Preferred
Stock shareholders 1.25% -- -- --
================ ================== ==================== ==================
[TABLE CONTINUED]
For the Year Ended November 30,
---------------------------------------
1995 1994
------------------- ------------------
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance
Net asset value, beginning of period $ 13.22 $ 15.88
------------------- ------------------
Investment income-- net 1.17 1.15
Realized and unrealized gain (loss)
on investments-- net 2.33 (2.67)
Dividends and distributions to
Preferred Stock shareholders:
Investment income-- net -- --
Realized gain on investments-- net -- --
In excess of realized gain on
investments-- net -- --
------------------- ------------------
Total from investment operations 3.50 (1.52)
------------------- ------------------
Less dividends and distributions to
Common Stock shareholders:
Investment income-- net (.90) (.93)
Realized gain on investments-- net -- (.01)
In excess of realized gain on
investments-- net -- --
------------------- ------------------
Total dividends and distributions to
Common Stock shareholders: (.90) (.94)
------------------- ------------------
Effect of Preferred Stock
activity:++++
Dividends and distributions to
Preferred Stock shareholders:
Investment income-- net (.26) (.20)
Realized gain on investments-- -- --
net
------------------- ------------------
Total effect of Preferred Stock (.26) (.20)
activity
------------------- ------------------
Net asset value, end of period $15.56 $13.22
=================== ==================
Market price per share, end of period $13.75 $12.125
=================== ==================
Total Investment Return*
Based on market price per share 21.26% (16.87%)
=================== ==================
Based on net asset value per share 25.85% (10.82%)
=================== ==================
Ratios Based on Average Net
Assets of Common Stock
Total expenses, net of reimbursement
and excluding reorganization
expenses** -- --
=================== ==================
Total expenses, excluding
reorganization expenses**
=================== ==================
Total expenses** -- --
=================== ==================
Total investment income-- net** -- --
=================== ==================
Amount of dividends to Preferred
Stock shareholders -- --
=================== ==================
(continued on following page)
11
(continued from prior page)
For the Six
Months
Ended
May 31, For the Year Ended November 30,
--------------------------------------------------------------
2004
(unaudited) 2003 2002 2001++ 2000++
--------------------- -------------- ------------- ---------------- ---------------
Investment income-- net, to Common
Stock shareholders %# 6.54% 6.48% 5.93% 5.68%
===================== ============== ============= ================ ===============
Ratios Based on Average Net Assets
of Common & Preferred Stock**++++
Total expenses, net of
reimbursement and
excluding reorganization expenses %# .70% .72% .72% .73%
===================== ============== ============= ================ ===============
Total expenses, excluding
reorganization expenses .70% .72% .72% .73%
===================== ============== ============= ================ ===============
Total expenses %# .70% .72% .72% .86%
===================== ============== ================ ===============
Total investment income-- net %# 4.78% 4.83% 4.95% 5.04%
===================== ============== ================ ===============
Ratios Based on Average Net
Assets of Preferred Stock + + + +
Dividends to Preferred Stock
shareholders %# .89% 1.25% 2.84% 3.77%
===================== ============== ============= ================ ===============
Supplemental Data
Net assets applicable to Common
Stock, end of period (in thousands) $ $218,642 $210,727 $209,617 $198,407
===================== ============== ============= ================ ===============
Preferred Stock outstanding, end
of period (in thousands) $ $97,500 $97,500 $97,500 $97,500
===================== ============== ============= ================ ===============
Portfolio turnover % 28.93% 41.47% 52.03% 54.78%
===================== ============== ============= ================ ===============
Leverage:
Asset coverage per $1,000 $ $3,242 $3,161 $3,150 $3,035
===================== ============== ============= ================ ===============
Dividends Per Share on Preferred
Stock Outstanding+++
Series A - Investment income-- net $ $225 $325 $723 $962
===================== ============== ============= ================ ===============
Series B - Investment income-- net $ $219 $292 $702 $739
===================== ============== ============= ================ ===============
[TABLE CONTINUED]
(continued from prior page)
For the Year Ended November 30,
-----------------------------------------------------------------------------
1999++ 1998 1997 1996\
---------------- ------------------- --------------------- ------------------
Investment income-- net, to Common
Stock shareholders 5.91% -- -- --
================ =================== ===================== ==================
Ratios Based on Average Net Assets ++++
of Common & Preferred Stock**
Total expenses, net of
reimbursement and
excluding reorganization expenses .73% -- -- --
================ =================== ===================== ==================
Total expenses, excluding
reorganization expenses .73%
================ =================== ===================== ==================
Total expenses .73% .71% .72% .72%
================ =================== ===================== ==================
Total investment income-- net 4.95% 5.03% 5.14% 5.18%
================ =================== ===================== ==================
Ratios Based on Average Net
Assets of Preferred Stock + + + +
Dividends to Preferred Stock
shareholders 2.81% -- -- --
================ =================== ===================== ==================
Supplemental Data
Net assets applicable to Common
Stock, end of period (in thousands) $123,760 $143,259 $137,633 $136,483
================ =================== ===================== ==================
Preferred Stock outstanding, end
of period (in thousands) $60,000 $60,000 $60,000 $60,000
================ =================== ===================== ==================
Portfolio turnover 57.94% 46.83% 30.50% 49.76%
================ =================== ===================== ==================
Leverage:
Asset coverage per $1,000 $3,063 $3,388 $3,294 $3,275
================ =================== ===================== ==================
Dividends Per Share on Preferred
Stock Outstanding+++
Series A - Investment income-- net $703 $798 $838 $837
================ =================== ===================== ==================
Series B - Investment income-- net -- -- -- --
================ =================== ===================== ==================
[TABLE CONTINUED]
(continued from prior page)
For the Year Ended November 30,
---------------------------------------
1995 1994
------------------- -------------------
Investment income-- net, to Common
Stock shareholders -- --
=================== ===================
Ratios Based on Average Net Assets
of Common & Preferred Stock**++++
Total expenses, net of
reimbursement and
excluding reorganization expenses -- --
=================== ===================
Total expenses, excluding
reorganization expenses
=================== ===================
Total expenses .73% .74%
=================== ===================
Total investment income-- net 5.40% 5.30%
=================== ===================
Ratios Based on Average Net
Assets of Preferred Stock + + + +
Dividends to Preferred Stock
shareholders -- --
=================== ===================
Supplemental Data
Net assets applicable to Common
Stock, end of period (in thousands) $137,355 $116,746
=================== ===================
Preferred Stock outstanding, end
of period (in thousands) $60,000 $60,000
=================== ===================
Portfolio turnover 32.79% 15.06%
=================== ===================
Leverage:
Asset coverage per $1,000 $3,289 $2,946
=================== ===================
Dividends Per Share on Preferred
Stock Outstanding+++
Series A - Investment income-- net $938 $741
=================== ===================
Series B - Investment income-- net -- --
=================== ===================
------------------
* Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may result
in substantially different returns. Total investment returns exclude
the effects of sales charges.
** Do not reflect the effect of dividends to Preferred Stock
shareholders.
+ Amount is less than $(.01) per share.
++ Certain prior year amounts have been reclassified to conform to
current year presentation.
+++ Dividends have been adjusted to reflect a two-for-one stock split that
occurred on December 1, 1994.
++++ The Fund's Preferred Stock was issued on November 30, 1992 (Series A)
and February 7, 2000 (Series B).
++ Based on average shares outstanding.
# Annualized.
## Aggregate total investment return.
THE FUND
MuniYield New Jersey Fund, Inc. (the "Fund") is a non-diversified,
closed-end fund. The Fund was incorporated under the laws of the State of
Maryland on February 21, 1992, and has registered under the Investment Company
Act of 1940, as amended. The Fund's principal office is located at 800
Scudders Mill Road, Plainsboro, New Jersey 08536, and its telephone number is
(609) 282-2800.
The Board of Directors of the Fund may at any time consider a merger,
consolidation or other form of reorganization of the Fund with one or more
other investment companies advised by the Investment Adviser that have similar
investment objectives and policies as the Fund. Any such merger, consolidation
or other form of reorganization would require the prior approval of the Board
of Directors and, if the Fund is the acquired fund, the stockholders of the
Fund. See "Description of Capital Stock--Certain Provisions of the Charter and
By-laws."
USE OF PROCEEDS
The net proceeds of this offering will be approximately $27,090,000 after
payment of offering expenses (estimated to be approximately $135,000) and the
deduction of the underwriting discount.
The net proceeds of the offering will be invested in accordance with the
Fund's investment objective and policies within approximately three months
after completion of this offering, depending on market conditions and the
availability of appropriate securities. Pending such investment, it is
anticipated that the proceeds will be invested in short term, tax exempt
securities. See "Investment Objective and Policies."
12
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Fund
as of May 31, 2004 and as adjusted to give effect to the issuance of the
shares of AMPS offered hereby.
Actual As Adjusted
---------------------- ----------------------
Preferred stock (3,900 shares of Other AMPS authorized, issued and outstanding
at $25,000 per share liquidation preference, plus accumulated but unpaid
dividends; 5,000 shares of AMPS and Other AMPS authorized, issued and
outstanding, as adjusted, at $25,000 per share liquidation preference,
plus accumulated but
unpaid dividends) ....................................................... $ $
====================== ======================
Common Stock, par value $.10 per share (199,996,100 shares
authorized, __________________ shares issued and outstanding;
199,995,000 shares authorized, ___________________ shares issued and
outstanding, as adjusted)
Paid-in capital in excess of par value.....................................
Undistributed investment income--net.......................................
Accumulated realized capital losses on investments--net.................... ( ) ( )
Unrealized appreciation on investments--net................................
---------------------- ----------------------
Net assets applicable to outstanding common stock.......................... $ $
====================== ======================
PORTFOLIO COMPOSITION
As of May 31, 2004, approximately % of the market value of the
Fund's portfolio was invested in long term municipal obligations and
approximately % of the market value of the Fund's portfolio was invested
in short term tax exempt securities. The following table sets forth certain
information with respect to the composition of the Fund's long term municipal
obligation investment portfolio as of May 31, 2004.
Number of Value
Moody's* Fitch* S&P* Issues (in thousands) Percent
------------ ---------- ---------- ------------ ---------------- ---------
Aaa AAA AAA $ %
Aa AA AA %
A A A %
Baa BBB BBB %
------------ ---------------- ---------
Total............................. $ 100%
============ ================ =========
----------
* Ratings: Using the higher of Moody's, S&P or Fitch Ratings ("Fitch")
ratings on the Fund's investments. See "Schedule of Investments." Moody's
rating categories may be modified further by a 1, 2 or 3 in Aa, A, Baa,
Ba, B and Caa ratings. S&P rating categories may be modified further by a
plus (+) or minus (-) in AA, A, BBB, BB, B and CCC ratings. Fitch rating
categories may be modified further by a plus (+) or minus (-) in AA, A,
BBB, BB, B and CCC.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide shareholders with as high a
level of current income exempt from Federal income taxes and New Jersey
personal income tax as is consistent with its investment policies and prudent
investment management. The Fund seeks to achieve its investment objective by
investing at least 80% of an aggregate of the Fund's net assets (including
proceeds from the issuance of any preferred stock) and the proceeds of any
borrowings for investment purposes, in a portfolio of municipal obligations
issued by or on behalf of the State of New Jersey, its political subdivisions,
agencies and instrumentalities and by other qualifying issuers, each of which
pays interest that, in the opinion of bond counsel to the issuer, is
excludable from gross income for Federal income tax purposes (except that the
interest may be includable in taxable income for purposes of the Federal
alternative minimum tax) and exempt from New Jersey personal income tax ("New
Jersey Municipal Bonds"). The Fund also may invest in municipal obligations
issued by or on behalf of states, territories and possessions of the
13
United States and their political subdivisions, agencies or instrumentalities,
each of which pays interest that, in the opinion of bond counsel to the
issuer, is excludable from gross income for Federal income tax purposes but is
not exempt from gross income for New Jersey personal income tax purposes
("Municipal Bonds"). Unless otherwise noted, the term "Municipal Bonds" also
includes New Jersey Municipal Bonds. The Fund typically invests at least 80%
of its total assets in New Jersey Municipal Bonds. The Fund's investment
objective and its policy of investing at least 80% of an aggregate of the
Fund's net assets (including proceeds from the issuance of any preferred
stock) and the proceeds of any borrowings for investment purposes, in New
Jersey Municipal Bonds are fundamental policies that may not be changed
without the approval of a majority of the outstanding voting securities of the
Fund (as defined in the 1940 Act). There can be no assurance that the Fund's
investment objective will be realized.
The Fund may invest in certain tax exempt securities classified as
"private activity bonds" (or industrial development bonds, under pre-1986 law)
("PABs") (in general, bonds that benefit non-governmental entities) that may
subject certain investors in the Fund to an alternative minimum tax. See
"Taxes." The percentage of the Fund's total assets invested in PABs will vary
from time to time. The Fund also will not invest more than 25% of its total
assets (taken at market value at the time of each investment) in Municipal
Bonds whose issuers are located in the same state.
Under normal market conditions, the Fund expects to invest primarily in a
portfolio of long term Municipal Bonds that are commonly referred to as
"investment grade" securities, which are obligations rated at the time of
purchase within the four highest quality ratings as determined by either
Moody's Investors Service, Inc. ("Moody's") (currently Aaa, Aa, A and Baa),
Standard & Poor's ("S&P") (currently AAA, AA, A and BBB) or Fitch Ratings
("Fitch") (currently AAA, AA, A and BBB). In the case of short term notes, the
investment grade rating categories are SP-1+ through SP-2 for S&P, MIG-1
through MIG-3 for Moody's and F-1+ through F-3 for Fitch. In the case of tax
exempt commercial paper, the investment grade rating categories are A-1+
through A-3 for S&P, Prime-1 through Prime-3 for Moody's and F-1+ through F-3
for Fitch. Obligations ranked in the lowest investment grade rating category
(BBB, SP-2 and A-3 for S&P; Baa, MIG-3 and Prime-3 for Moody's and BBB and F-3
for Fitch), while considered "investment grade," may have certain speculative
characteristics. There may be sub-categories or gradations indicating relative
standing within the rating categories set forth above. In assessing the
quality of Municipal Bonds with respect to the foregoing requirements, the
Investment Adviser takes into account the nature of any letters of credit or
similar credit enhancement to which particular Municipal Bonds are entitled
and the creditworthiness of the financial institution which provided such
credit enhancement. See Appendix B--"Description of Municipal Bond Ratings" to
the statement of additional information. If unrated, such securities will
possess creditworthiness comparable, in the opinion of the Investment Adviser,
to other obligations in which the Fund may invest.
All percentage and ratings limitations on securities in which the Fund
may invest apply at the time of making an investment and shall not be
considered violated if an investment rating is subsequently downgraded to a
rating that would have precluded the Fund's initial investment in such
security. In the event that the Fund disposes of a portfolio security
subsequent to its being downgraded, the Fund may experience a greater risk of
loss than if such security had been sold prior to such downgrade.
The average maturity of the Fund's portfolio securities will vary based
upon the Investment Adviser's assessment of economic and market conditions.
The net asset value of the shares of common stock of a closed-end investment
company, such as the Fund, which invests primarily in fixed income securities,
changes as the general levels of interest rates fluctuate. When interest rates
decline, the value of a fixed income portfolio can be expected to rise.
Conversely, when interest rates rise, the value of a fixed income portfolio
can be expected to decline. Prices of longer term securities generally
fluctuate more in response to interest rate changes than do shorter term
securities. These changes in net asset value are likely to be greater in the
case of a fund having a leveraged capital structure, such as the Fund.
For temporary periods or to provide liquidity, the Fund has the authority
to invest as much as 20% of its total assets in tax exempt and taxable money
market obligations with a maturity of one year or less (such short term
obligations being referred to herein as "Temporary Investments"). In addition,
the Fund reserves the right as a defensive measure to invest temporarily a
greater portion of its assets in Temporary Investments, when, in the opinion
of the Investment Adviser, prevailing market or financial conditions warrant.
Taxable money market obligations will yield taxable income. The Fund also may
invest in variable rate demand obligations ("VRDOs")
14
and VRDOs in the form of participation interests ("Participating VRDOs") in
variable rate tax exempt obligations held by a financial institution. See
"Other Investment Policies -- Temporary Investments." The Fund's hedging
strategies, which are described in more detail under "Hedging Transactions --
Financial Futures Transactions and Options," are not fundamental policies and
may be modified by the Board of Directors of the Fund without the approval of
the Fund's stockholders. The Fund is also authorized to invest in indexed and
inverse floating rate obligations for hedging purposes and to seek to enhance
return.
The Fund may invest in securities not issued by or on behalf of a state
or territory or by an agency or instrumentality thereof, if the Fund receives
an opinion of counsel to the issuer that such securities pay interest that is
excludable from gross income for Federal income tax purposes and, if applicble,
exempt from New Jersey personal income tax ("Non-Municipal Tax Exempt
Securities"). Non-Municipal Tax Exempt Securities could include trust
certificates, partnership interests or other instruments evidencing interest
in one or more long term municipal securities. Non-Municipal Tax Exempt
Securities also may include securities issued by other investment companies
that invest in Municipal Bonds, to the extent such investments are permitted
by the Fund's investment restrictions and applicable law. Non-Municipal Tax
Exempt Securities are subject to the same risks associated with an investment
in Municipal Bonds as well as many of the risks associated with investments in
derivatives. While the Fund receives opinions of legal counsel to the effect
that the income from the Non-Municipal Tax Exempt Securities in which the Fund
invests is excludable from gross income for Federal income tax purposes to the
same extent as the underlying municipal securities, the Internal Revenue
Service ("IRS") has not issued a ruling on this subject. Were the IRS to issue
an adverse ruling or take an adverse position with respect to the taxation of
these types of securities, there is a risk that the interest paid on such
securities would be deemed taxable at the Federal level.
The Fund ordinarily does not intend to realize significant investment
income not exempt from Federal income tax and New Jersey personal income tax.
From time to time, the Fund may realize taxable capital gains.
Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation that may be enacted in the future may affect
the availability of Municipal Bonds for investment by the Fund.
Risk Factors and Special Considerations Relating to New Jersey Municipal Bonds
The Fund ordinarily will invest at least 80% of its total assets in New
Jersey Municipal Bonds; therefore, it is more susceptible to factors adversely
affecting issuers of New Jersey Municipal Bonds than is a municipal bond fund
that is not concentrated in issuers of New Jersey Municipal Bonds to this
degree. The Investment Adviser does not believe that the current economic
conditions in New Jersey will have a significant adverse effect on the Fund's
ability to invest in high quality New Jersey Municipal Bonds. Currently, New
Jersey general obligation bonds are rated AA by S&P, Aa2 by Moody's and AA by
Fitch. Additionally, on March 10, 2004, Moody's placed New Jersey's general
obligation bonds on a rating watch for possible downgrade. No assurance can be
given that such rating will not be lowered in the future. For a discussion of
economic and other conditions in the State of New Jersey, see Appendix A--
"Economic and Other Conditions in New Jersey" in the statement of additional
information.
Risk Factors and Special Considerations Relating to Municipal Bonds
The risks and special considerations involved in investment in Municipal
Bonds vary with the types of instruments being acquired. Investments in
Non-Municipal Tax Exempt Securities may present similar risks, depending on
the particular product. Certain instruments in which the Fund may invest may
be characterized as derivative instruments. See "-- Description of Municipal
Bonds" and "-- Hedging Transactions -- Financial Futures Transactions and
Options."
The value of Municipal Bonds generally may be affected by uncertainties
in the municipal markets as a result of legislation or litigation, including
legislation or litigation that changes the taxation of Municipal Bonds or the
rights of Municipal Bond holders in the event of a bankruptcy. Municipal
bankruptcies are rare, and certain provisions of the U.S. Bankruptcy Code
governing such bankruptcies are unclear. Further, the application of state law
to Municipal Bond issuers could produce varying results among the states or
among Municipal Bond issuers
15
within a state. These uncertainties could have a significant impact on the
prices of the Municipal Bonds in which the Fund invests.
Description of Municipal Bonds
Set forth below is a detailed description of the Municipal Bonds and
Temporary Investments in which the Fund may invest. Information with respect
to ratings assigned to tax exempt obligations that the Fund may purchase is
set forth in Appendix B to the statement of additional information.
Obligations are included within the term Municipal Bonds if the interest paid
thereon is excluded from gross income for Federal income tax purposes in the
opinion of bond counsel to the issuer.
Municipal Bonds include debt obligations issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities, refunding of outstanding obligations and obtaining funds for
general operating expenses and loans to other public institutions and
facilities. In addition, certain types of bonds are issued by or on behalf of
public authorities to finance various privately owned or operated facilities,
including certain facilities for the local furnishing of electric energy or
gas, sewage facilities, solid waste disposal facilities and other specialized
facilities. Other types of PABs, the proceeds of which are used for the
construction, equipment or improvement of privately operated industrial or
commercial facilities, may constitute Municipal Bonds, although the current
Federal tax laws place substantial limitations on the size of such issues. The
interest on Municipal Bonds may bear a fixed rate or be payable at a variable
or floating rate. The two principal classifications of Municipal Bonds are
"general obligation" and "revenue" bonds, which latter category includes PABs.
The Fund has not established any limit on the percentage of its portfolio
that may be invested in PABs. The Fund may not be a suitable investment for
investors who are already subject to the Federal alternative minimum tax or
who would become subject to the Federal alternative minimum tax as a result of
an investment in the Fund's common stock. See "Taxes."
General Obligation Bonds. General obligation bonds are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. The taxing power of any governmental entity may be
limited, however, by provisions of its state constitution or laws, and an
entity's creditworthiness will depend on many factors, including potential
erosion of its tax base due to population declines, natural disasters,
declines in the state's industrial base or inability to attract new
industries, economic limits on the ability to tax without eroding the tax
base, state legislative proposals or voter initiatives to limit ad valorem
real property taxes and the extent to which the entity relies on Federal or
state aid, access to capital markets or other factors beyond the state's or
entity's control. Accordingly, the capacity of the issuer of a general
obligation bond as to the timely payment of interest and the repayment of
principal when due is affected by the issuer's maintenance of its tax base.
Revenue Bonds. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue sources such as
payments from the user of the facility being financed. Accordingly, the timely
payment of interest and the repayment of principal in accordance with the
terms of the revenue or special obligation bond is a function of the economic
viability of such facility or such revenue source.
PABs. The Fund may purchase PABs. PABs are, in most cases, tax exempt
securities issued by states, municipalities or public authorities to provide
funds, usually through a loan or lease arrangement, to a private entity for
the purpose of financing construction or improvement of a facility to be used
by the entity. Such bonds are secured primarily by revenues derived from loan
repayments or lease payments due from the entity which may or may not be
guaranteed by a parent company or otherwise secured. PABs generally are not
secured by a pledge of the taxing power of the issuer of such bonds.
Therefore, an investor should be aware that repayment of such bonds generally
depends on the revenues of a private entity and be aware of the risks that
such an investment may entail. Continued ability of an entity to generate
sufficient revenues for the payment of principal and interest on such bonds
will be affected by many factors including the size of the entity, capital
structure, demand for its products or services, competition, general economic
conditions, government regulation and the entity's dependence on revenues for
the operation of the particular facility being financed.
16
Moral Obligation Bonds. The Fund also may invest in "moral obligation"
bonds, which are normally issued by special purpose public authorities. If an
issuer of moral obligation bonds is unable to meet its obligations, the
repayment of such bonds becomes a moral commitment but not a legal obligation
of the state or municipality in question.
Municipal Lease Obligations. Also included within the general category of
Municipal Bonds are certificates of participation ("COPs") issued by
government authorities or entities to finance the acquisition or construction
of equipment, land and/or facilities. COPs represent participations in a
lease, an installment purchase contract or a conditional sales contract
(hereinafter collectively called "lease obligations") relating to such
equipment, land or facilities. Although lease obligations do not constitute
general obligations of the issuer for which the issuer's unlimited taxing
power is pledged, a lease obligation is frequently backed by the issuer's
covenant to budget for, appropriate and make the payments due under the lease
obligation. However, certain lease obligations contain "non-appropriation"
clauses which provide that the issuer has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Although "non-appropriation" lease obligations
are secured by the leased property, disposition of the property in the event
of foreclosure might prove difficult and the value of the property may be
insufficient to issue lease obligations. Certain investments in lease
obligations may be illiquid.
Indexed and Inverse Floating Rate Securities. The Fund may invest in
Municipal Bonds (and Non- Municipal Tax Exempt Securities) that yield a return
based on a particular index of value or interest rates. For example, the Fund
may invest in Municipal Bonds that pay interest based on an index of Municipal
Bond interest rates. The principal amount payable upon maturity of certain
Municipal Bonds also may be based on the value of the index. To the extent the
Fund invests in these types of Municipal Bonds, the Fund's return on such
Municipal Bonds will be subject to risk with respect to the value of the
particular index. Interest and principal payable on the Municipal Bonds may
also be based on relative changes among particular indices. Also, the Fund may
invest in so-called "inverse floating obligations" or "residual interest
bonds" on which the interest rates vary inversely with a short term floating
rate (which may be reset periodically by a dutch auction, a remarketing agent,
or by reference to a short term tax exempt interest rate index). The Fund may
purchase synthetically created inverse floating rate bonds evidenced by
custodial or trust receipts. Generally, income on inverse floating rate bonds
will decrease when short term interest rates increase, and will increase when
short term interest rates decrease. Such securities have the effect of
providing a degree of investment leverage, since they may increase or decrease
in value in response to changes, as an illustration, in market interest rates
at a rate which is a multiple (typically two) of the rate at which fixed rate
long term tax exempt securities increase or decrease in response to such
changes. As a result, the market values of such securities will generally be
more volatile than the market values of fixed rate tax exempt securities. To
seek to limit the volatility of these securities, the Fund may purchase
inverse floating obligations with shorter-term maturities or which contain
limitations on the extent to which the interest rate may vary. Certain
investments in such obligations may be illiquid.
When Issued Securities, Delayed Delivery Securities and Forward
Commitments. The Fund may purchase or sell securities that it is entitled to
receive on a when issued basis. The Fund may also purchase or sell securities
on a delayed delivery basis. The Fund may also purchase or sell securities
through a forward commitment. These transactions involve the purchase or sale
of securities by the Fund at an established price with payment and delivery
taking place in the future. The purchase will be recorded on the date the Fund
enters into the commitment and the value of the securities will thereafter be
reflected in the Fund's net asset value. The Fund enters into these
transactions to obtain what is considered an advantageous price to the Fund at
the time of entering into the transaction. The Fund has not established any
limit on the percentage of its assets that may be committed in connection with
these transactions. When the Fund purchases securities in these transactions,
the Fund segregates liquid securities in an amount equal to the amount of its
purchase commitments.
There can be no assurance that a security purchased on a when issued
basis will be issued or that a security purchased or sold through a forward
commitment will be delivered. A default by a counterparty may result in the
Fund missing the opportunity of obtaining a price considered to be
advantageous. The value of securities in these transactions on the delivery
date may be more or less than the Fund's purchase price. The Fund may bear the
risk of a decline in the value of the security in these transactions and may
not benefit from an appreciation in the value of the security during the
commitment period.
17
Call Rights. The Fund may purchase a Municipal Bond issuer's right to
call all or a portion of such Municipal Bond for mandatory tender for purchase
(a "Call Right"). A holder of a Call Right may exercise such right to require
a mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to maturity of
the related Municipal Bond will expire without value. The economic effect of
holding both the Call Right and the related Municipal Bond is identical to
holding a Municipal Bond as a non-callable security. Certain investments in
such obligations may be illiquid.
Yields. Yields on Municipal Bonds are dependent on a variety of factors,
including the general condition of the money market and of the municipal bond
market, the size of a particular offering, the financial condition of the
issuer, the maturity of the obligation and the rating of the issue. The
ability of the Fund to achieve its investment objective is also dependent on
the continuing ability of the issuers of the securities in which the Fund
invests to meet their obligations for the payment of interest and principal
when due. There are variations in the risks involved in holding Municipal
Bonds, both within a particular classification and between classifications,
depending on numerous factors. Furthermore, the rights of owners of Municipal
Bonds and the obligations of the issuer of such Municipal Bonds may be subject
to applicable bankruptcy, insolvency and similar laws and court decisions
affecting the rights of creditors generally and to general equitable
principles, which may limit the enforcement of certain remedies.
Hedging Transactions
The Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain
financial futures contracts and options thereon. While the Fund's use of
hedging strategies is intended to reduce the volatility of the net asset value
of the Fund's shares of common stock, the net asset value of the Fund's shares
of common stock will fluctuate. No assurance can be given that the Fund's
hedging transactions will be effective. The Fund only may engage in hedging
activities from time to time and may not necessarily be engaging in hedging
activities when movements in interest rates occur. The Fund has no obligation
to enter into hedging transactions and may choose not to do so. Furthermore,
for so long as the AMPS are rated by Moody's and S&P, the Fund's use of
options and certain financial futures and options thereon will be subject to
the limitations described under "Rating Agency Guidelines."
Financial Futures Transactions and Options. The Fund is authorized to
purchase and sell certain exchange traded financial futures contracts
("financial futures contracts") in order to hedge its investments in Municipal
Bonds against declines in value, and to hedge against increases in the cost of
securities it intends to purchase or to seek to enhance the Fund's return.
However, any transactions involving financial futures or options (including
puts and calls associated therewith) will be in accordance with the Fund's
investment policies and limitations. A financial futures contract obligates
the seller of a contract to deliver and the purchaser of a contract to take
delivery of the type of financial instrument covered by the contract, or in
the case of index-based futures contracts to make and accept a cash
settlement, at a specific future time for a specified price. To hedge its
portfolio, the Fund may take an investment position in a futures contract
which will move in the opposite direction from the portfolio position being
hedged. A sale of financial futures contracts may provide a hedge against a
decline in the value of portfolio securities because such depreciation may be
offset, in whole or in part, by an increase in the value of the position in
the financial futures contracts. A purchase of financial futures contracts may
provide a hedge against an increase in the cost of securities intended to be
purchased because such appreciation may be offset, in whole or in part, by an
increase in the value of the position in the futures contracts.
Distributions, if any, of net long term capital gains from certain
transactions in futures or options are taxable at long term capital gains
rates for Federal income tax purposes. See "Taxes."
Futures Contracts. A futures contract is an agreement between two parties
to buy and sell a security or, in the case of an index-based futures contract,
to make and accept a cash settlement for a set price on a future date. A
majority of transactions in futures contracts, however, do not result in the
actual delivery of the underlying instrument or cash settlement, but are
settled through liquidation, i.e., by entering into an offsetting transaction.
Futures contracts have been designed by boards of trade which have been
designated "contracts markets" by the Commodity Futures Trading Commission
("CFTC").
18
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead,
an amount of cash or securities acceptable to the broker and the relevant
contract market, which varies, but is generally about 5% of the contract
amount, must be deposited with the broker. This amount is known as "initial
margin" and represents a "good faith" deposit assuring the performance of both
the purchaser and seller under the futures contract. Subsequent payments to
and from the broker, called "variation margin," are required to be made on a
daily basis as the price of the futures contract fluctuates making the long
and short positions in the futures contract more or less valuable, a process
known as "marking to the market." At any time prior to the settlement date of
the futures contract, the position may be closed out by taking an opposite
position that will operate to terminate the position in the futures contract.
A final determination of variation margin is then made, additional cash is
required to be paid to or released by the broker and the purchaser realizes a
loss or gain. In addition, a nominal commission is paid on each completed sale
transaction.
The Fund deals in financial futures contracts based on a long term
municipal bond index developed by the Chicago Board of Trade ("CBT") and The
Bond Buyer (the "Municipal Bond Index"). The Municipal Bond Index is comprised
of 40 tax exempt municipal revenue and general obligation bonds. Each bond
included in the Municipal Bond Index must be rated A or higher by Moody's or
S&P and must have a remaining maturity of 19 years or more. Twice a month new
issues satisfying the eligibility requirements are added to, and an equal
number of old issues are deleted from, the Municipal Bond Index. The value of
the Municipal Bond Index is computed daily according to a formula based on the
price of each bond in the Municipal Bond Index, as evaluated by six
dealer-to-dealer brokers.
The Municipal Bond Index futures contract is traded only on the CBT. Like
other contract markets, the CBT assures performance under futures contracts
through a clearing corporation, a nonprofit organization managed by the
exchange membership which is also responsible for handling daily accounting of
deposits or withdrawals of margin.
The Fund may also purchase and sell financial futures contracts on U.S.
Government securities as a hedge against adverse changes in interest rates as
described below. With respect to U.S. Government securities, currently there
are financial futures contracts based on long term U.S. Treasury bonds, U.S.
Treasury notes, Government National Mortgage Association ("GNMA") Certificates
and three-month U.S. Treasury bills. The Fund may purchase and write call and
put options on futures contracts on U.S. Government securities and purchase
and sell Municipal Bond Index futures contracts in connection with its hedging
strategies.
The Fund also may engage in other futures contracts transactions such as
futures contracts on other municipal bond indices that may become available if
the Investment Adviser should determine that there is normally a sufficient
correlation between the prices of such futures contracts and the Municipal
Bonds in which the Fund invests to make such hedging appropriate.
Futures Strategies. The Fund may sell a financial futures contract (i.e.,
assume a short position) in anticipation of a decline in the value of its
investments in Municipal Bonds resulting from an increase in interest rates or
otherwise. The risk of decline could be reduced without employing futures as a
hedge by selling such Municipal Bonds and either reinvesting the proceeds in
securities with shorter maturities or by holding assets in cash. This
strategy, however, entails increased transaction costs in the form of dealer
spreads and typically would reduce the average yield of the Fund's portfolio
securities as a result of the shortening of maturities. The sale of futures
contracts provides an alternative means of hedging against declines in the
value of its investments in Municipal Bonds. As such values decline, the value
of the Fund's positions in the futures contracts will tend to increase, thus
offsetting all or a portion of the depreciation in the market value of the
Fund's Municipal Bond investments that are being hedged. While the Fund will
incur commission expenses in selling and closing out futures positions,
commissions on futures transactions are lower than transaction costs incurred
in the purchase and sale of Municipal Bonds. In addition, the ability of the
Fund to trade in the standardized contracts available in the futures markets
may offer a more effective defensive position than a program to reduce the
average maturity of the portfolio securities due to the unique and varied
credit and technical characteristics of the municipal debt instruments
available to the Fund. Employing futures as a hedge also may permit the Fund
to assume a defensive posture without reducing the yield on its investments
beyond any amounts required to engage in futures trading.
When the Fund intends to purchase Municipal Bonds, the Fund may purchase
futures contracts as a hedge against any increase in the cost of such
Municipal Bonds resulting from a decrease in interest rates or otherwise, that
19
may occur before such purchases can be effected. Subject to the degree of
correlation between the Municipal Bonds and the futures contracts, subsequent
increases in the cost of Municipal Bonds should be reflected in the value of
the futures held by the Fund. As such purchases are made, an equivalent amount
of futures contracts will be closed out. Due to changing market conditions and
interest rate forecasts, however, a futures position may be terminated without
a corresponding purchase of portfolio securities.
Call Options on Futures Contracts. The Fund may also purchase and sell
exchange traded call and put options on financial futures contracts. The
purchase of a call option on a futures contract is analogous to the purchase
of a call option on an individual security. Depending on the pricing of the
option compared to either the futures contract upon which it is based or the
price of the underlying debt securities, it may or may not be less risky than
ownership of the futures contract or underlying debt securities. Like the
purchase of a futures contract, the Fund will purchase a call option on a
futures contract to hedge against a market advance when the Fund is not fully
invested.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration is below
the exercise price, the Fund will retain the full amount of the option premium
which provides a partial hedge against any decline that may have occurred in
the Fund's portfolio holdings.
Put Options on Futures Contracts. The purchase of a put option on a
futures contract is analogous to the purchase of a protective put option on
portfolio securities. The Fund will purchase a put option on a futures
contract to hedge the Fund's portfolio against the risk of rising interest
rates.
The writing of a put option on a futures contract constitutes a partial
hedge against increasing prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration is higher
than the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any increase in the price of
Municipal Bonds which the Fund intends to purchase.
The writer of an option on a futures contract is required to deposit
initial and variation margin pursuant to requirements similar to those
applicable to futures contracts. Premiums received from the writing of an
option will be included in initial margin. The writing of an option on a
futures contract involves risks similar to those relating to futures
contracts.
Under regulations of the CFTC, the futures trading activity described
herein will not result in the Fund being deemed a "commodity pool" and the
Fund need not be operated by a person registered with the CFTC as a "commodity
pool operator."
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash, cash equivalents (e.g.,
high grade commercial paper and daily tender adjustable notes) or liquid
securities will be segregated so that the amount so segregated, plus the
amount of initial and variation margin held in the account of its broker,
equals the market value of the futures contracts, thereby ensuring that the
use of such futures contract is unleveraged. It is not anticipated that
transactions in futures contracts will have the effect of increasing portfolio
turnover.
Risk Factors in Futures Transactions and Options. Investment in futures
contracts involves the risk of imperfect correlation between movements in the
price of the futures contract and the price of the security being hedged. The
hedge will not be fully effective when there is imperfect correlation between
the movements in the prices of two financial instruments. For example, if the
price of the futures contract moves more than the price of the hedged
security, the Fund will experience either a loss or gain on the futures
contract which is not completely offset by movements in the price of the
hedged securities. To compensate for imperfect correlations, the Fund may
purchase or sell futures contracts in a greater dollar amount than the hedged
securities if the volatility of the hedged securities is historically greater
than the volatility of the futures contracts. Conversely, the Fund may
purchase or sell fewer futures contracts if the volatility of the price of the
hedged securities is historically less than that of the futures contracts.
20
The particular municipal bonds comprising the index underlying the
Municipal Bond Index financial futures contract may vary from the bonds held
by the Fund. As a result, the Fund's ability to hedge effectively all or a
portion of the value of its Municipal Bonds through the use of such financial
futures contracts will depend in part on the degree to which price movements
in the index underlying the financial futures contract correlate with the
price movements of the Municipal Bonds held by the Fund. The correlation may
be affected by disparities in the average maturity, ratings, geographical mix
or structure of the Fund's investments as compared to those comprising the
Municipal Bond Index and general economic or political factors. In addition,
the correlation between movements in the value of the Municipal Bond Index may
be subject to change over time as additions to and deletions from the
Municipal Bond Index alter its structure. The correlation between futures
contracts on U.S. Government securities and the Municipal Bonds held by the
Fund may be adversely affected by similar factors and the risk of imperfect
correlation between movements in the prices of such futures contracts and the
prices of Municipal Bonds held by the Fund may be greater. Municipal Bond
Index futures contracts were approved for trading in 1986. Trading in such
futures contracts may tend to be less liquid than trading in other futures
contracts. The trading of futures contracts also is subject to certain market
risks, such as inadequate trading activity, which could at times make it
difficult or impossible to liquidate existing positions.
The Fund expects to liquidate a majority of the futures contracts it
enters into through offsetting transactions on the applicable contract market.
There can be no assurance, however, that a liquid secondary market will exist
for any particular futures contract at any specific time. Thus, it may not be
possible to close out a futures position. In the event of adverse price
movements, the Fund would continue to be required to make daily cash payments
of variation margin. In such situations, if the Fund has insufficient cash, it
may be required to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. The inability
to close out futures positions also could have an adverse impact on the Fund's
ability to hedge effectively its investments in Municipal Bonds. The liquidity
of a secondary market in a futures contract may be adversely affected by
"daily price fluctuation limits" established by commodity exchanges which
limit the amount of fluctuation in a futures contract price during a single
trading day. Once the daily limit has been reached in the contract, no trades
may be entered into at a price beyond the limit, thus preventing the
liquidation of open futures positions. Prices have in the past moved beyond
the daily limit on a number of consecutive trading days. The Fund will enter
into a futures position only if, in the judgment of the Investment Adviser,
there appears to be an actively traded secondary market for such futures
contracts.
The successful use of transactions in futures and related options also
depends on the ability of the Investment Adviser to forecast correctly the
direction and extent of interest rate movements within a given time frame. To
the extent interest rates remain stable during the period in which a futures
contract or option is held by the Fund or such rates move in a direction
opposite to that anticipated, the Fund may realize a loss on the hedging
transaction which is not fully or partially offset by an increase in the value
of portfolio securities. As a result, the Fund's total return for such period
may be less than if it had not engaged in the hedging transaction.
Because of low initial margin deposits made upon the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the futures contracts can result in
substantial unrealized gains or losses. There is also the risk of loss by the
Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a financial futures contract. Because the Fund
will engage in the purchase and sale of futures contracts for hedging purposes
or to seek to enhance the Fund's return, any losses incurred in connection
therewith should, if the hedging strategy is successful, be offset in whole or
in part by increases in the value of securities held by the Fund or decreases
in the price of securities the Fund intends to acquire.
The amount of risk the Fund assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of
an option on a futures contract also entails the risk that changes in the
value of the underlying futures contract will not be fully reflected in the
value of the option purchased.
21
OTHER INVESTMENT POLICIES
The Fund has adopted certain other policies as set forth below.
Temporary Investments
The Fund may invest in short term tax exempt and taxable securities
subject to the limitations set forth above. The tax exempt money market
securities may include municipal notes, municipal commercial paper, municipal
bonds with a remaining maturity of less than one year, variable rate demand
notes and participations therein. Municipal notes include tax anticipation
notes, bond anticipation notes, revenue anticipation notes and grant
anticipation notes. Anticipation notes are sold as interim financing in
anticipation of tax collection, bond sales, government grants or revenue
receipts. Municipal commercial paper refers to short term unsecured promissory
notes generally issued to finance short term credit needs. The taxable money
market securities in which the Fund may invest as Temporary Investments
consist of U.S. Government securities, U.S. Government agency securities,
domestic bank or savings institution certificates of deposit and bankers'
acceptances, short term corporate debt securities such as commercial paper and
repurchase agreements. These Temporary Investments must have a stated maturity
not in excess of one year from the date of purchase. The Fund may not invest
in any security issued by a commercial bank or a savings institution unless
the bank or institution is organized and operating in the United States, has
total assets of at least one billion dollars and is a member of the Federal
Deposit Insurance Corporation ("FDIC"), except that up to 10% of total assets
may be invested in certificates of deposit of smaller institutions if such
certificates are fully insured by the FDIC.
Interest Rate Swap Transactions
In order to seek to hedge the value of the Fund against interest rate
fluctuations, to hedge against increases in the Fund's costs associated with
the dividend payments on any preferred stock, including the AMPS, or to seek
to increase the Fund's return, the Fund may enter into interest rate swap
transactions such as Municipal Market Data AAA Cash Curve swaps ("MMD Swaps")
or Bond Market Association Municipal Swap Index swaps ("BMA Swaps"). To the
extent that the Fund enters into these transactions, the Fund expects to do so
primarily to preserve a return or spread on a particular investment or portion
of its portfolio as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund may enter into these transactions primarily as a hedge or for
duration or risk management rather than as a speculative investment. However,
the Fund also may invest in MMD Swaps and BMA Swaps to seek to enhance return
or gain or to increase the Fund's yield, for example, during periods of steep
interest rate yield curves (i.e., wide differences between short term and long
term interest rates).
The Fund may purchase and sell BMA Swaps in the BMA swap market. In a BMA
Swap, the Fund exchanges with another party their respective commitments to
pay or receive interest (e.g., an exchange of fixed rate payments for floating
rate payments linked to the Bond Market Association Municipal Swap Index).
Because the underlying index is a tax exempt index, BMA Swaps may reduce
cross-market risks incurred by the Fund and increase the Fund's ability to
hedge effectively. BMA Swaps are typically quoted for the entire yield curve,
beginning with a seven day floating rate index out to 30 years. The duration
of a BMA Swap is approximately equal to the duration of a fixed rate Municipal
Bond with the same attributes as the swap (e.g., coupon, maturity, call
feature).
The Fund also may purchase and sell MMD Swaps, also known as MMD rate
locks. An MMD Swap permits the Fund to lock in a specified municipal interest
rate for a portion of its portfolio to preserve a return on a particular
investment or a portion of its portfolio as a duration management technique or
to protect against any increase in the price of securities to be purchased at
a later date. By using an MMD Swap, the Fund can create a synthetic long or
short position, allowing the Fund to select the most attractive part of the
yield curve. An MMD Swap is a contract between the Fund and an MMD Swap
provider pursuant to which the parties agree to make payments to each other on
a notional amount, contingent upon whether the Municipal Market Data AAA
General Obligation Scale is above or below a specified level on the expiration
date of the contract. For example, if the Fund buys an MMD Swap and the
Municipal Market Data AAA General Obligation Scale is below the specified
level on the expiration date, the counterparty to the contract will make a
payment to the Fund equal to the specified level minus the actual level,
multiplied by the notional amount of the contract. If the Municipal Market
Data AAA
22
General Obligation Scale is above the specified level on the expiration date,
the Fund will make a payment to the counterparty equal to the actual level
minus the specified level, multiplied by the notional amount of the contract.
In connection with investments in BMA and MMD Swaps, there is a risk that
municipal yields will move in the opposite direction than anticipated by the
Fund, which would cause the Fund to make payments to its counterparty in the
transaction that could adversely affect the Fund's performance.
The Fund has no obligation to enter into BMA or MMD Swaps and may not do
so. The net amount of the excess, if any, of the Fund's obligations over its
entitlements with respect to each interest rate swap will be accrued on a
daily basis, and the Fund will segregate liquid securities having an aggregate
net asset value at least equal to the accrued excess.
Credit Default Swap Agreements
The Fund may enter into credit default swap agreements for hedging
purposes or to seek to increase its return. The credit default swap agreement
may have as reference obligations one or more securities that are not
currently held by the Fund. The protection "buyer" in a credit default
contract may be obligated to pay the protection "seller" an upfront or a
periodic stream of payments over the term of the contract provided that no
credit event on a reference obligation has occurred. If a credit event occurs,
the seller generally must pay the buyer the "par value" (full notional value)
of the swap in exchange for an equal face amount of deliverable obligations of
the reference entity described in the swap, or the seller may be required to
deliver the related net cash amount, if the swap is cash settled. The Fund may
be either the buyer or seller in the transaction. If the Fund is a buyer and
no credit event occurs, the Fund may recover nothing if the swap is held
through its termination date. However, if a credit event occurs, the buyer
generally may elect to receive the full notional value of the swap in exchange
for an equal face amount of deliverable obligations of the reference entity
whose value may have significantly decreased. As a seller, the Fund generally
receives an upfront payment or a fixed rate of income throughout the term of
the swap, which typically is between six months and three years, provided that
there is no credit event. If a credit event occurs, generally the seller must
pay the buyer the full notional value of the swap in exchange for an equal
face amount of deliverable obligations of the reference entity whose value may
have significantly decreased. As the seller, the Fund would effectively add
leverage to its portfolio because, in addition to its total net assets, the
Fund would be subject to investment exposure on the notional amount of the
swap.
Credit default swap agreements involve greater risks than if the Fund had
invested in the reference obligation directly since, in addition to general
market risks, credit default swaps are subject to illiquidity risk,
counterparty risk and credit risks. The Fund will enter into credit default
swap agreements only with counterparties who are rated investment grade
quality by at least one nationally recognized statistical rating organization
at the time of entering into such transaction or whose creditworthiness is
believed by the Investment Adviser to be equivalent to such rating. A buyer
generally also will lose its investment and recover nothing should no credit
event occur and the swap is held to its termination date. If a credit event
were to occur, the value of any deliverable obligation received by the seller,
coupled with the upfront or periodic payments previously received, may be less
than the full notional value it pays to the buyer, resulting in a loss of
value to the seller. The Fund's obligations under a credit default swap
agreement will be accrued daily (offset against any amounts owing to the
Fund). The Fund will at all times segregate with its custodian in connection
with each such transaction liquid securities or cash with a value at least
equal to the Fund's exposure (any accrued but unpaid net amounts owed by the
Fund to any counterparty), on a marked-to-market basis (as calculated pursuant
to requirements of the Commission). Such segregation will ensure that the Fund
has assets available to satisfy its obligations with respect to the
transaction and will avoid any potential leveraging of the Fund's portfolio.
Such segregation will not limit the Fund's exposure to loss.
VRDOs and Participating VRDOs
VRDOs are tax exempt obligations that contain a floating or variable
interest rate adjustment formula and right of demand on the part of the holder
thereof to receive payment of the unpaid principal balance plus accrued
interest upon a short notice period not to exceed seven days. There is,
however, the possibility that because of default or insolvency the demand
feature of VRDOs and Participating VRDOs may not be honored. The interest
rates are adjustable at intervals (ranging from daily to up to one year) to
some prevailing market rate for similar investments, such adjustment formula
being calculated to maintain the market value of the VRDOs, at
23
approximately the par value of the VRDOs on the adjustment date. The
adjustments typically are based upon the Public Securities Association Index
or some other appropriate interest rate adjustment index. The Fund may invest
in all types of tax exempt instruments currently outstanding or to be issued
in the future which satisfy its short term maturity and quality standards.
Participating VRDOs provide the Fund with a specified undivided interest
(up to 100%) of the underlying obligation and the right to demand payment of
the unpaid principal balance plus accrued interest on the Participating VRDOs
from the financial institution upon a specified number of days' notice, not to
exceed seven days. In addition, the Participating VRDO is backed by an
irrevocable letter of credit or guaranty of the financial institution. The
Fund would have an undivided interest in the underlying obligation and thus
participate on the same basis as the financial institution in such obligation
except that the financial institution typically retains fees out of the
interest paid on the obligation for servicing the obligation, providing the
letter of credit and issuing the repurchase commitment. The Fund has been
advised by its counsel that the Fund should be entitled to treat the income
received on Participating VRDOs as interest from tax exempt obligations as
long as the Fund does not invest more than 20% of its total assets in such
investments and certain other conditions are met. It is contemplated that the
Fund will not invest more than 20% of its assets in Participating VRDOs.
VRDOs that contain an unconditional right of demand to receive payment of
the unpaid principal balance plus accrued interest on a notice period
exceeding seven days may be deemed to be illiquid securities. The Directors
may adopt guidelines and delegate to the Investment Adviser the daily function
of determining and monitoring liquidity of such VRDOs. The Directors, however,
will retain sufficient oversight and will be ultimately responsible for such
determinations.
The Temporary Investments, VRDOs and Participating VRDOs in which the
Fund may invest will be in the following rating categories at the time of
purchase: MIG-1/VMIG-1 through MIG-3/VMIG-3 for notes and VRDOs and Prime-1
through Prime-3 for commercial paper (as determined by Moody's), SP-1 through
SP-2 for notes and A-1 through A-3 for VRDOs and commercial paper (as
determined by S&P), or F-1 through F-3 for notes, VRDOs and commercial paper
(as determined by Fitch). Temporary Investments, if not rated, must be of
comparable quality in the opinion of the Investment Adviser. In addition, the
Fund reserves the right to invest temporarily a greater portion of its assets
in Temporary Investments for defensive purposes, when, in the judgment of the
Investment Adviser, market conditions warrant.
Repurchase Agreements
The Fund may invest in securities pursuant to repurchase agreements.
Repurchase agreements may be entered into only with a member bank of the
Federal Reserve System or primary dealer or an affiliate thereof, in U.S.
Government securities. Under such agreements, the bank or primary dealer or an
affiliate thereof agrees, upon entering into the contract, to repurchase the
security at a mutually agreed upon time and price, thereby determining the
yield during the term of the agreement. This results in a fixed rate of return
insulated from market fluctuations during such period. In repurchase
agreements, the prices at which the trades are conducted do not reflect
accrued interest on the underlying obligations. Such agreements usually cover
short periods, such as under one week. Repurchase agreements may be construed
to be collateralized loans by the purchaser to the seller secured by the
securities transferred to the purchaser. In a repurchase agreement, the Fund
will require the seller to provide additional collateral if the market value
of the securities falls below the repurchase price at any time during the term
of the repurchase agreement. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may
suffer time delays and incur costs or possible losses in connection with the
disposition of the collateral. In the event of a default under such a
repurchase agreement, instead of the contractual fixed rate of return, the
rate of return to the Fund shall be dependent upon intervening fluctuations of
the market value of such security and the accrued interest on the security. In
such event, the Fund would have rights against the seller for breach of
contract with respect to any losses arising from market fluctuations following
the failure of the seller to perform.
In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold." Therefore,
amounts earned under such agreements will not be considered tax exempt
interest. The treatment of purchase and sales contracts is less certain.
24
Borrowings
The Fund is authorized to borrow money in amounts of up to 5% of the
value of its total assets at the time of such borrowings; provided, however,
that the Fund is authorized to borrow moneys in amounts of up to 33?% of the
value of its total assets at the time of such borrowings to finance the
repurchase of its own common stock pursuant to tender offers or otherwise to
redeem or repurchase shares of preferred stock. Borrowings by the Fund
(commonly known, as with the issuance of preferred stock, as "leveraging")
create an opportunity for greater total return since, for example, the Fund
will not be required to sell portfolio securities to repurchase or redeem
shares but, at the same time, increase exposure to capital risk. In addition,
borrowed funds are subject to interest costs that may offset or exceed the
return earned on the borrowed funds.
DESCRIPTION OF AMPS
Certain of the capitalized terms used herein not otherwise defined in
this prospectus have the meaning provided in the Glossary at the back of this
prospectus.
General
The Series C AMPS will be shares of preferred stock that entitle their
holders to receive dividends when, as and if declared by the Board of
Directors, out of funds legally available therefor, at a rate per annum that
may vary for the successive Dividend Periods. After the Initial Dividend
Period, each Subsequent Dividend Period for the Series C AMPS generally will
be a 7-Day Dividend Period; provided however, that, prior to any Auction, the
Fund may elect, subject to certain limitations described herein, upon giving
notice to holders thereof, a Special Dividend Period. The Applicable Rate for
a particular Dividend Period will be determined by an Auction conducted on the
Business Day before the start of such Dividend Period. Beneficial Owners and
Potential Beneficial Owners of shares of AMPS may participate in Auctions
therefor, although, except in the case of a Special Dividend Period of more
than 28 days, Beneficial Owners desiring to continue to hold all of their
shares of AMPS regardless of the Applicable Rate resulting from Auctions need
not participate. For an explanation of Auctions and the method of determining
the Applicable Rate, see "The Auction" herein and in the statement of
additional information.
The Fund has outstanding 3,900 shares of two other series of Auction
Market Preferred Stock, each with a liquidation preference of $25,000 per
share, plus accumulated but unpaid dividends, for an aggregate initial
liquidation preference of $97,500,000 (the "Other AMPS"). The Other AMPS are
as follows: 2,400 shares of Auction Market Preferred Stock, Series A; and
1,500 shares of Auction Market Preferred Stock, Series B. The Series C AMPS
offered hereby rank on a parity with the Other AMPS with respect to dividends
and liquidation preference. The terms of the shares of Other AMPS are
substantially the same as the terms of the shares of AMPS described below.
The following is a brief description of the terms of the shares of AMPS.
This description does not purport to be complete and is subject to and
qualified in its entirety by reference to the Fund's Charter and Articles
Supplementary of the AMPS, including the provisions thereof establishing the
AMPS. The Fund's Charter and the form of Articles Supplementary of the AMPS
establishing the terms of the AMPS have been filed as exhibits to the
Registration Statement of which this prospectus is a part.
Dividends
General. The holders of shares of AMPS will be entitled to receive, when,
as and if declared by the Board of Directors of the Fund, out of funds legally
available therefor, cumulative cash dividends on their shares, at the
Applicable Rate determined as set forth below under "Determination of Dividend
Rate," payable on the respective dates set forth below. Dividends on the
shares of AMPS so declared and payable shall be paid (i) in preference to and
in priority over any dividends so declared and payable on the Fund's common
stock, and (ii) to the extent permitted under the Code, and to the extent
available, out of net tax exempt income earned on the Fund's investments.
Generally, dividends on shares of AMPS, to the extent that they are derived
from interest paid on New Jersey Municipal Bonds, will be exempt from Federal
income taxes, subject to possible application of the alternative minimum tax
and New Jersey personal income tax, and to the extent that they are derived
from interest paid on
25
Municipal Bonds, will be exempt from Federal income taxes, subject to possible
application of the alternative minimum tax. See "Taxes."
Dividends on the shares of AMPS will accumulate from the date on which
the Fund originally issues the shares of AMPS (the "Date of Original Issue")
and will be payable on the dates described below. Dividends on shares of AMPS
with respect to the Initial Dividend Period shall be payable on the Initial
Dividend Payment Date. Following the Initial Dividend Payment Date for the
AMPS, dividends on the AMPS will be payable, at the option of the Fund, either
(i) with respect to any 7-Day Dividend Period and any Short Term Dividend
Period of 35 or fewer days, on the day next succeeding the last day thereof or
(ii) with respect to any Short Term Dividend Period of more than 35 days and
with respect to any Long Term Dividend Period, monthly on the first Business
Day of each calendar month during such Short Term Dividend Period or Long Term
Dividend Period and on the day next succeeding the last day thereof (each such
date referred to in clause (i) or (ii) being referred to herein as a "Normal
Dividend Payment Date"), except that if such Normal Dividend Payment Date is
not a Business Day, the Dividend Payment Date shall be the first Business Day
next succeeding such Normal Dividend Payment Date. Thus, following the Initial
Dividend Payment Date for AMPS, dividends generally will be payable (in the
case of Dividend Periods which are not Special Dividend Periods) on each
succeeding Tuesday in the case of the Series C AMPS. Although any particular
Dividend Payment Date may not occur on the originally scheduled date because
of the exceptions discussed above, the next succeeding Dividend Payment Date,
subject to such exceptions, will occur on the next following originally
scheduled date. If for any reason a Dividend Payment Date cannot be fixed as
described above, then the Board of Directors shall fix the Dividend Payment
Date. The Board of Directors by resolution prior to authorization of a
dividend by the Board of Directors may change a Dividend Payment Date if such
change does not adversely affect the contract rights of the holders of shares
of AMPS set forth in the Charter. The Initial Dividend Period, 7-Day Dividend
Periods and Special Dividend Periods are hereinafter sometimes referred to as
"Dividend Periods." Each dividend payment date determined as provided above is
hereinafter referred to as a "Dividend Payment Date."
Prior to each Dividend Payment Date, the Fund is required to deposit with
the Auction Agent sufficient funds for the payment of declared dividends. The
Fund does not intend to establish any reserves for the payment of dividends.
Each dividend will be paid to the record holder of the AMPS, which holder
is expected to be the nominee of the Securities Depository. See "The
Auction--Securities Depository." The Securities Depository will credit the
accounts of the Agent Members of the Existing Holders in accordance with the
Securities Depository's normal procedures which provide for payment in
same-day funds. The Agent Member of an Existing Holder will be responsible for
holding or disbursing such payments on the applicable Dividend Payment Date to
such Existing Holder in accordance with the instructions of such Existing
Holder. Dividends in arrears for any past Dividend Period may be declared and
paid at any time, without reference to any regular Dividend Payment Date, to
the nominee of the Securities Depository. Any dividend payment made on shares
of AMPS first shall be credited against the earliest declared but unpaid
dividends accumulated with respect to such shares.
Holders of shares of AMPS will not be entitled to any dividends, whether
payable in cash, property or stock, in excess of full cumulative dividends
except as described below under "--Additional Dividends" in this prospectus
and under "Description of AMPS--Dividends--Non-Payment Period; Late Charge" in
the statement of additional information. No interest will be payable in
respect of any dividend payment or payments on the shares of AMPS that may be
in arrears.
The amount of cash dividends per share of the AMPS payable (if declared)
on the Initial Dividend Payment Date, and on each Dividend Payment Date of
each 7-Day Dividend Period and each Short Term Dividend Period, shall be
computed by multiplying the Applicable Rate for such Dividend Period by a
fraction, the numerator of which will be the number of days in such Dividend
Period or part thereof that such share was outstanding and for which dividends
are payable on such Dividend Payment Date and the denominator of which will be
365, multiplying the amount so obtained by $25,000, and rounding the amount so
obtained to the nearest cent. During any Long Term Dividend Period, the amount
of cash dividends per share of AMPS payable (if declared) on any Dividend
Payment Date shall be computed by multiplying the Applicable Rate for such
Dividend Period by a fraction, the numerator of which will be such number of
days in such part of such Dividend Period that such share was outstanding and
for
26
which dividends are payable on such Dividend Payment Date and the denominator
of which will be 360, multiplying the amount so obtained by $25,000, and
rounding the amount so obtained to the nearest cent.
Notification of Dividend Period. With respect to each Dividend Period
that is a Special Dividend Period, the Fund, at its sole option and to the
extent permitted by law, by telephonic and written notice (a "Request for
Special Dividend Period") to the Auction Agent and to each Broker-Dealer, may
request that the next succeeding Dividend Period for the AMPS will be a number
of days (other than seven), evenly divisible by seven, and not fewer than
seven nor more than 364 in the case of a Short Term Dividend Period or one
whole year or more but not greater than five years in the case of a Long Term
Dividend Period, specified in such notice, provided that the Fund may not give
a Request for Special Dividend Period (and any such request shall be null and
void) unless, for any Auction occurring after the initial Auction, Sufficient
Clearing Bids were made in the last occurring Auction and unless full
cumulative dividends and any amounts due with respect to redemptions, and any
Additional Dividends payable prior to such date have been paid in full. Such
Request for Special Dividend Period, in the case of a Short Term Dividend
Period, shall be given on or prior to the second Business Day but not more
than seven Business Days prior to an Auction Date for the AMPS and, in the
case of a Long Term Dividend Period, shall be given on or prior to the second
Business Day but not more than 28 days prior to an Auction Date for the AMPS.
Upon receiving such Request for Special Dividend Period, the Broker-Dealers
jointly shall determine whether, given the factors set forth below, it is
advisable that the Fund issue a Notice of Special Dividend Period for the AMPS
as contemplated by such Request for Special Dividend Period and the Optional
Redemption Price of the AMPS during such Special Dividend Period and the
Specific Redemption Provisions and shall give the Fund written notice (a
"Response") of such determination by no later than the second Business Day
prior to such Auction Date. In the event the Response indicates that it is
advisable that the Fund give a notice of a Special Dividend Period for the
AMPS, the Fund, by no later than the second Business Day prior to such Auction
Date may give a notice (a "Notice of Special Dividend Period") to the Auction
Agent, the Securities Depository and each Broker-Dealer. See "Description of
AMPS--Dividends--Notification of Dividend Period" in the statement of
additional information for a detailed description of these procedures.
Determination of Dividend Rate. The dividend rate on shares of the AMPS
during the period from and including the Date of Original Issue for the Series
C AMPS to but excluding the Initial Dividend Payment Date (the "Initial
Dividend Period") with respect to the Series C AMPS will be the rate per annum
set forth above under "Prospectus Summary--Dividends and Dividend Periods."
Commencing on the Initial Dividend Payment Date for the Series C AMPS, the
Applicable Rate on the Series C AMPS for each Subsequent Dividend Period,
which Subsequent Dividend Period shall be a period commencing on and including
a Dividend Payment Date and ending on and including the calendar day prior to
the next Dividend Payment Date (or calendar day prior to the last Dividend
Payment Date in a Dividend Period if there is more than one Dividend Payment
Date), shall be equal to the rate per annum that results from the Auction with
respect to such Subsequent Dividend Period. The Initial Dividend Period and
Subsequent Dividend Period for the AMPS is referred to herein as a "Dividend
Period." Cash dividends shall be calculated as set forth above under
"Dividends--General."
Restrictions on Dividends and Other Payments. Under the 1940 Act, the
Fund may not declare dividends or make other distributions on shares of common
stock or purchase any such shares if, at the time of the declaration,
distribution or purchase, as applicable (and after giving effect thereto),
asset coverage (as defined in the 1940 Act) with respect to the outstanding
shares of AMPS (and Other AMPS) would be less than 200% (or such other
percentage as in the future may be required by law). The Fund estimates that,
based on the composition of its portfolio at May 31, 2004, asset coverage with
respect to shares of AMPS would be approximately [ ]% representing
approximately [ ]% of the Fund's capital and [ ]% of the Fund's common stock
equity immediately after the issuance of the shares of AMPS offered hereby.
Under the Code, the Fund, among other things, must distribute at least 90% of
its investment company taxable income each year in order to maintain its
qualification for tax treatment as a regulated investment company. The
foregoing limitations on dividends, distributions and purchases under certain
circumstances may impair the Fund's ability to maintain such qualification.
See "Taxes" in the statement of additional information.
Upon any failure to pay dividends on shares of AMPS for two years or
more, the holders of the shares of AMPS will acquire certain additional voting
rights. See "Voting Rights" below. Such rights shall be the exclusive remedy
of the holders of shares of AMPS upon any failure to pay dividends on shares
of the Fund.
27
Additional Dividends. If the Fund retroactively allocates any net capital
gain or other income subject to regular Federal income taxes to shares of AMPS
without having given advance notice thereof to the Auction Agent as described
under "The Auction--Auction Procedures--Auction Date; Advance Notice of
Allocation of Taxable Income; Inclusion of Taxable Income in Dividends" below,
which may only happen when such allocation is made as a result of the
redemption of all or a portion of the outstanding shares of AMPS or the
liquidation of the Fund (the amount of such allocation referred to herein as a
"Retroactive Taxable Allocation"), the Fund, within 90 days (and generally
within 60 days) after the end of the Fund's fiscal year for which a
Retroactive Taxable Allocation is made, will provide notice thereof to the
Auction Agent and to each holder of shares (initially Cede as nominee of the
Securities Depository) during such fiscal year at such holder's address as the
same appears or last appeared on the stock books of the Fund. The Fund, within
30 days after such notice is given to the Auction Agent, will pay to the
Auction Agent (who then will distribute to such holders of shares of AMPS),
out of funds legally available therefor, an amount equal to the aggregate
Additional Dividend (as defined below) with respect to all Retroactive Taxable
Allocations made to such holders during the fiscal year in question.
An "Additional Dividend" means payment to a present or former holder of
shares of AMPS of an amount which, when taken together with the aggregate
amount of Retroactive Taxable Allocations made to such holder with respect to
the fiscal year in question, would cause such holder's dividends in dollars
(after Federal and New Jersey income tax consequences) from the aggregate of
both the Retroactive Taxable Allocations and the Additional Dividend to be
equal to the dollar amount of the dividends which would have been received by
such holder if the amount of the aggregate Retroactive Taxable Allocations had
been excludable from the gross income of such holder. Such Additional Dividend
shall be calculated (i) without consideration being given to the time value of
money; (ii) assuming that no holder of shares of AMPS is subject to the
Federal alternative minimum tax with respect to dividends received from the
Fund; and (iii) assuming that each Retroactive Taxable Allocation would be
taxable in the hands of each holder of shares of AMPS at the greater of: (a)
the maximum combined marginal regular Federal and New Jersey individual income
tax rate applicable to ordinary income or capital gains depending on the
taxable character of the distribution (including any surtax); or (b) the
maximum combined marginal regular Federal and New Jersey corporate income tax
rate applicable to ordinary income or capital gains depending on the taxable
character of the distribution (taking into account in both (a) and (b) the
Federal income tax deductibility of state and local taxes paid or incurred but
not any phase out of, or provision limiting, personal exemptions, itemized
deductions, or the benefit of lower tax brackets and assuming the taxability
of Federally tax exempt dividends for corporations for New Jersey income tax
purposes). Although the Fund generally intends to designate any Additional
Dividend as an exempt-interest dividend to the extent permitted by applicable
law, it is possible that all or a portion of any Additional Dividend will be
taxable to the recipient thereof. See "Taxes" in the statement of additional
information. The Fund will not pay a further Additional Dividend with respect
to any taxable portion of an Additional Dividend.
If the Fund does not give advance notice of the amount of taxable income
to be included in a dividend on shares of AMPS in the related Auction, the
Fund may include such taxable income in a dividend on shares of AMPS if it
increases the dividend by an additional amount calculated as if such income
were a Retroactive Taxable Allocation and the additional amount were an
Additional Dividend and notifies the Auction Agent of such inclusion at least
five Business Days prior to the applicable Dividend Payment Date. See "The
Auction--Auction Procedures--Auction Date; Advance Notice of Allocation of
Taxable Income; Inclusion of Taxable Income in Dividends" below.
Asset Maintenance
The Fund will be required to satisfy two separate asset maintenance
requirements under the terms of the Articles Supplementary. These requirements
are summarized below.
1940 Act AMPS Asset Coverage. The Fund will be required under the
Articles Supplementary to maintain, with respect to shares of AMPS, as of the
last Business Day of each month in which any shares of AMPS are outstanding,
asset coverage of at least 200% with respect to senior securities that are
stock, including the shares of AMPS and Other AMPS (or such other asset
coverage as in the future may be specified in or under the 1940 Act as the
minimum asset coverage for senior securities that are stock of a closed-end
investment company as a condition of paying dividends on its common stock)
("1940 Act AMPS Asset Coverage"). If the Fund fails to maintain 1940 Act AMPS
Asset Coverage and such failure is not cured as of the last Business Day of
the following month (the
28
"1940 Act Cure Date"), the Fund will be required under certain circumstances
to redeem certain of the shares of AMPS. See "Redemption" below.
Based upon the composition of the Fund's portfolio at May 31, 2004, the
1940 Act AMPS Asset Coverage immediately following the issuance of AMPS
offered hereby (after giving effect to the deduction of the underwriting
discount and offering expenses for the shares of AMPS) will be computed as
follows:
Value of Fund assets less
liabilities not constituting
senior securities = $ = %
--------------------------------------------------------- --------------------
Senior securities $
representing indebtedness
plus liquidation value of the
shares of AMPS
AMPS Basic Maintenance Amount. So long as shares of AMPS are outstanding,
the Fund will be required under the Articles Supplementary to maintain as of
the last Business Day of each week (a "Valuation Date") Moody's Eligible
Assets and S&P Eligible Assets each having in the aggregate a Discounted Value
at least equal to the AMPS Basic Maintenance Amount. The AMPS Basic
Maintenance Amount includes the sum of (i) the aggregate liquidation value of
AMPS and Other AMPS then outstanding and (ii) certain accrued and projected
payment obligations of the Fund. See "Description of AMPS--Asset
Maintenance--AMPS Basic Maintenance Amount" in the statement of additional
information. If the Fund fails to meet such requirement as of any Valuation
Date and such failure is not cured on or before the sixth Business Day after
such Valuation Date (the "AMPS Basic Maintenance Cure Date"), the Fund will be
required under certain circumstances to redeem certain of the shares of AMPS.
Upon any failure to maintain the required Discounted Value, the Fund will use
its best efforts to alter the composition of its portfolio to reattain a
Discounted Value at least equal to the AMPS Basic Maintenance Amount on or
prior to the AMPS Basic Maintenance Cure Date. See "Redemption" herein and in
the statement of additional information.
Redemption
Optional Redemption. To the extent permitted under the 1940 Act and under
Maryland law, upon giving a Notice of Redemption, as provided in the statement
of additional information, the Fund, at its option, may redeem shares of AMPS,
in whole or in part, out of funds legally available therefor, at the Optional
Redemption Price per share on any Dividend Payment Date; provided that no
share of AMPS may be redeemed at the option of the Fund during (a) the Initial
Dividend Period with respect to such share or (b) a Non-Call Period to which
such share is subject. "Optional Redemption Price" means $25,000 per share of
AMPS plus an amount equal to accumulated but unpaid dividends (whether or not
earned or declared) to the date fixed for redemption plus any applicable
redemption premium, if any, attributable to the designation of a Premium Call
Period. In addition, holders of AMPS may be entitled to receive Additional
Dividends in the event of redemption of such AMPS to the extent provided
herein. See "Dividends--Additional Dividends." The Fund has the authority to
redeem the AMPS for any reason and may redeem all or part of the outstanding
shares of AMPS if it anticipates that the Fund's leveraged capital structure
will result in a lower rate of return to holders of common stock for any
significant period of time than that obtainable if the common stock were
unleveraged.
Mandatory Redemption. The Fund will be required to redeem, out of funds
legally available therefor, at the Mandatory Redemption Price per share,
shares of AMPS to the extent permitted under the 1940 Act and Maryland law, on
a date fixed by the Board of Directors, if the Fund fails to maintain Moody's
Eligible Assets and S&P Eligible Assets each with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount or to satisfy
the 1940 Act AMPS Asset Coverage and such failure is not cured on or before
the AMPS Basic Maintenance Cure Date or the 1940 Act Cure Date (herein
collectively referred to as a "Cure Date"), as the case may be. "Mandatory
Redemption Price" means $25,000 per share of AMPS plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) to the
date fixed for redemption. In addition, holders of AMPS may be entitled to
receive Additional Dividends in the event of redemption of such AMPS to the
extent provided herein. See "Dividends--Additional Dividends."
29
For a discussion of the allocation procedures to be used if fewer than
all of the outstanding shares of AMPS are to be redeemed and for a discussion
of other redemption procedures, see "Description of AMPS--Redemption" in the
statement of additional information.
Liquidation Rights
Upon any liquidation, dissolution or winding up of the Fund, whether
voluntary or involuntary, the holders of shares of AMPS will be entitled to
receive, out of the assets of the Fund available for distribution to
stockholders, before any distribution or payment is made upon any shares of
common stock or any other capital stock of the Fund ranking junior in right of
payment upon liquidation of AMPS, $25,000 per share together with the amount
of any dividends accumulated but unpaid (whether or not earned or declared)
thereon to the date of distribution, and after such payment the holders of
AMPS will be entitled to no other payments except for Additional Dividends. If
such assets of the Fund shall be insufficient to make the full liquidation
payment on the outstanding shares of AMPS and liquidation payments on any
other outstanding class or series of preferred stock of the Fund ranking on a
parity with the AMPS as to payment upon liquidation, including the Other AMPS,
then such assets will be distributed among the holders of such shares of AMPS
and the holders of shares of such other class or series, including the Other
AMPS, ratably in proportion to the respective preferential amounts to which
they are entitled. After payment of the full amount of liquidation
distribution to which they are entitled, the holders of AMPS will not be
entitled to any further participation in any distribution of assets by the
Fund. A consolidation, merger or share exchange of the Fund with or into any
other entity or entities or a sale, whether for cash, shares of stock,
securities or properties, of all or substantially all or any part of the
assets of the Fund shall not be deemed or construed to be a liquidation,
dissolution or winding up of the Fund.
Voting Rights
Except as otherwise indicated in this prospectus and the statement of
additional information and except as otherwise required by applicable law,
holders of shares of AMPS will be entitled to one vote per share on each
matter submitted to a vote of stockholders of the Fund and will vote together
with holders of shares of Other AMPS and holders of shares of common stock as
a single class.
The 1940 Act and the Articles Supplementary require that the holders of
preferred stock, including the AMPS and Other AMPS, voting as a separate
class, have the rights to elect two of the Fund's Directors at all times and
to elect a majority of the Directors at any time that two full years'
dividends on the AMPS (and Other AMPS) are unpaid. The holders of AMPS (and
Other AMPS) will vote as a separate class or classes on certain other matters
as required under the Articles Supplementary, the 1940 Act and Maryland law.
In addition, the Series C AMPS (and Other AMPS) may vote as a separate series
under certain circumstances. See "Description of AMPS--Voting Rights" in the
statement of additional information.
THE AUCTION
Certain of the capitalized terms used herein not otherwise defined in
this prospectus have the meaning provided in the Glossary at the back of this
prospectus.
General
Holders of the shares of the Series C AMPS will be entitled to receive
cumulative cash dividends on their shares when, as and if declared by the
Board of Directors of the Fund, out of funds legally available therefor, on
the Initial Dividend Payment Date with respect to the Initial Dividend Period
and, thereafter, on each Dividend Payment Date with respect to a Subsequent
Dividend Period (generally a period of seven days, subject to certain
exceptions set forth under "Description of AMPS--Dividends--General") at the
rate per annum equal to the Applicable Rate for each such Dividend Period.
The provisions of the Articles Supplementary establishing the terms of
the shares of AMPS offered hereby will provide that the Applicable Rate for
the Series C AMPS for each Dividend Period after the Initial Dividend Period
therefor will be equal to the rate per annum that the Auction Agent advises
has resulted on the Business Day
30
preceding the first day of such Dividend Period due to implementation of the
auction procedures set forth in the Articles Supplementary (the "Auction
Procedures") in which persons determine to hold or offer to purchase or sell
shares of AMPS. The Auction Procedures are attached as Appendix D to the
statement of additional information.
Each periodic operation of such procedures with respect to the shares of
AMPS is referred to hereinafter as an "Auction." If, however, the Fund should
fail to pay or duly provide for the full amount of any dividend on shares of
AMPS or the redemption price of shares of AMPS called for redemption, the
Applicable Rate for shares of AMPS will be determined as set forth under
"Description of AMPS--Dividends--Non-Payment Period; Late Charge" in the
statement of additional information.
Auction Agent Agreement. The Fund has entered into an agreement with The
Bank of New York (together with any successor bank or trust company or other
entity entering into a similar agreement with this Fund, the "Auction Agent")
(the "Auction Agent Agreement"), which provides, among other things, that the
Auction Agent will follow the Auction Procedures for the purpose of
determining the Applicable Rate for the AMPS. The Fund will pay the Auction
Agent compensation for its services under the Auction Agent Agreement.
Broker-Dealer Agreements. The Auction Agent has entered into agreements
with Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and
more than twenty other broker-dealers and may enter into similar agreements
(collectively, the "Broker-Dealer Agreements") with one or more other
broker-dealers (collectively, the "Broker-Dealers") selected by the Fund,
which provide for the participation of such Broker-Dealers in Auctions.
Merrill Lynch is an affiliate of the Investment Adviser in that they share a
common parent, Merrill Lynch & Co., Inc.
Securities Depository. The Depository Trust Company initially will act as
the Securities Depository for the Agent Members with respect to the shares of
the Series C AMPS. One or more registered certificates for all of the shares
of the Series C AMPS initially will be registered in the name of Cede, as
nominee of the Securities Depository. The certificate will bear a legend to
the effect that such certificate is issued subject to the provisions
restricting transfers of shares of AMPS to which it relates contained in the
Articles Supplementary. Cede initially will be the holder of record of all
shares of AMPS, and Beneficial Owners will not be entitled to receive
certificates representing their ownership interest in such shares. The
Securities Depository will maintain lists of its participants and will
maintain the positions (ownership interests) of shares of AMPS held by each
Agent Member, whether as the Beneficial Owner thereof for its own account or
as nominee for the Beneficial Owner thereof. Payments made by the Fund to
holders of AMPS will be duly made by making payments to the nominee of the
Securities Depository.
Auction Procedures
The following is a brief discussion of the procedures to be used in
conducting Auctions. This summary is qualified by reference to the Auction
Procedures set forth in Appendix D to the statement of additional information.
The Settlement Procedures to be used with respect to Auctions are set forth in
Appendix C to the statement of additional information.
Auction Date; Advance Notice of Allocation of Taxable Income; Inclusion
of Taxable Income in Dividends. An Auction to determine the Applicable Rate
for the shares of the Series C AMPS offered hereby for each Dividend Period
(other than the Initial Dividend Period therefor) will be held on the first
Business Day (as hereinafter defined) preceding the first day of such Dividend
Period, which first day is also a Dividend Payment Date for the preceding
Dividend Period (the date of each Auction being referred to herein as an
"Auction Date"). "Business Day" means a day on which the New York Stock
Exchange (the "NYSE") is open for trading and which is not a Saturday, Sunday
or other day on which banks in the City of New York are authorized or
obligated by law to close. Auctions for shares of the Series C AMPS for
Dividend Periods after the Initial Dividend Period normally will be held every
Monday after the preceding Dividend Payment Date, and each subsequent Dividend
Period normally will begin on the following Tuesday (also a Dividend Payment
Date). The Auction Date and the first day of the related Dividend Period (both
of which must be Business Days) need not be consecutive calendar days. For
example, in most cases, if the Monday that normally would be an Auction Date
for the Series C AMPS is not a Business Day, then such Auction Date will be
the preceding Friday and the first day of the related Dividend Period will
continue to be the following Tuesday. See "Description of AMPS -- Dividends"
for information concerning the circumstances under
31
which a Dividend Payment Date may fall on a date other than the days specified
above, which may affect the Auction Date.
Except as noted below, whenever the Fund intends to include any net
capital gain or other income subject to regular Federal income taxes in any
dividend on shares of AMPS, the Fund will notify the Auction Agent of the
amount to be so included at least five Business Days prior to the Auction Date
on which the Applicable Rate for such dividend is to be established. Whenever
the Auction Agent receives such notice from the Fund, in turn it will notify
each Broker-Dealer, who, on or prior to such Auction Date, in accordance with
its Broker-Dealer Agreement, will notify its customers who are Beneficial
Owners and Potential Beneficial Owners believed to be interested in submitting
an Order in the Auction to be held on such Auction Date. The Fund also may
include such income in a dividend on shares of AMPS without giving advance
notice thereof if it increases the dividend by an additional amount calculated
as if such income were a Retroactive Taxable Allocation and the additional
amount were an Additional Dividend; provided that the Fund will notify the
Auction Agent of the additional amounts to be included in such dividend at
least five Business Days prior to the applicable Dividend Payment Date. See
"Description of AMPS--Dividends--Additional Dividends" above.
Orders by Beneficial Owners, Potential Beneficial Owners, Existing
Holders and Potential Holders. On or prior to each Auction Date:
(a) each Beneficial Owner may submit to its Broker-Dealer by
telephone a:
(i) Hold Order -- indicating the number of outstanding shares,
if any, of AMPS that such Beneficial Owner desires to continue to
hold without regard to the Applicable Rate for the next Dividend
Period for such shares;
(ii) Bid -- indicating the number of outstanding shares, if
any, of AMPS that such Beneficial Owner desires to continue to hold,
provided that the Applicable Rate for the next Dividend Period for
such shares is not less than the rate per annum then specified by
such Beneficial Owner; and/or
(iii) Sell Order -- indicating the number of outstanding
shares, if any, of AMPS that such Beneficial Owner offers to sell
without regard to the Applicable Rate for the next Dividend Period
for such shares; and
(b) Broker-Dealers will contact customers who are Potential
Beneficial Owners of shares of AMPS to determine whether such Potential
Beneficial Owners desire to submit Bids indicating the number of shares
of AMPS which they offer to purchase provided that the Applicable Rate
for the next Dividend Period for such shares is not less than the rates
per annum specified in such Bids.
The communication by a Beneficial Owner or Potential Beneficial Owner to
a Broker-Dealer and the communication by a Broker-Dealer, whether or not
acting for its own account, to the Auction Agent of the foregoing information
is hereinafter referred to as an "Order" and collectively as "Orders." A
Beneficial Owner or a Potential Beneficial Owner placing an Order, including a
Broker-Dealer acting in such capacity for its own account, is hereinafter
referred to as a "Bidder" and collectively as "Bidders." Any Order submitted
by a Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or
by a Broker-Dealer to the Auction Agent, prior to the Submission Deadline on
any Auction Date shall be irrevocable.
In an Auction, a Beneficial Owner may submit different types of Orders
with respect to shares of AMPS then held by such Beneficial Owner, as well as
Bids for additional shares of AMPS. For information concerning the priority
given to different types of Orders placed by Beneficial Owners, see
"Submission of Orders by Broker-Dealers to Auction Agent" below.
The Maximum Applicable Rate for shares of AMPS will be the higher of (A)
the Applicable Percentage of the Reference Rate or (B) the Applicable Spread
plus the Reference Rate. The Auction Agent will round each applicable Maximum
Applicable Rate to the nearest one-thousandth (0.001) of one percent per
annum, with any
32
such number ending in five ten-thousandths of one percent being rounded
upwards to the nearest one-thousandth (0.001) of one percent. The Auction
Agent will not round the applicable Reference Rate as part of its calculation
of the Maximum Applicable Rate.
The Maximum Applicable Rate for shares of AMPS will depend on the credit
rating or ratings assigned to such shares. The Applicable Percentage and the
Applicable Spread will be determined based on (i) the lower of the credit
rating or ratings assigned on such date to such shares by Moody's and S&P (or
if Moody's or S&P or both shall not make such rating available, the equivalent
of either or both of such ratings by a Substitute Rating Agency or two
Substitute Rating Agencies or, in the event that only one such rating shall be
available, such rating) and (ii) whether the Fund has provided notification to
the Auction Agent prior to the Auction establishing the Applicable Rate for
any dividend that net capital gain or other taxable income will be included in
such dividend on shares of AMPS as follows:
Applicable Applicable Applicable Applicable
Credit Ratings Percentage Percentage Spread Over Spread Over
------------------------------------------------
of Reference of Reference Reference Reference
Rate--No Rate-- Rate--No Rate--
Moody's S&P Notification Notification Notification Notification
---------------------- ------------------------ ---------------- ---------------- ---------------- ----------------
Aaa AAA 110% 125% 1.10% 1.25%
Aa3 to Aa1 AA- to AA+ 125% 150% 1.25% 1.50%
A3 to A1 A- to A+ 150% 200% 1.50% 2.00%
Baa3 to Baa1 BBB- to BBB+ 175% 250% 1.75% 2.50%
Below Baa3 Below BBB- 200% 300% 2.00% 3.00%
There is no minimum Applicable Rate in respect of any Dividend Period.
The Applicable Percentage and the Applicable Spread as so determined may
be further subject to upward but not downward adjustment in the discretion of
the Board of Directors of the Fund after consultation with the Broker-Dealers,
provided that immediately following any such increase, the Fund would be in
compliance with the AMPS Basic Maintenance Amount. The Fund will take all
reasonable action necessary to enable either S&P or Moody's, or both to
provide a rating for the AMPS, subject to the Fund's ability to terminate
compliance with the rating agency guidelines as discussed under "Rating Agency
Guidelines." If either S&P or Moody's, or both, shall not make such a rating
available, and subject to the Fund's ability to terminate compliance with the
rating agency guidelines discussed under "Rating Agency Guidelines," Merrill
Lynch or its affiliates and successors, after obtaining the Fund's approval,
will select another NRSRO (a "Substitute Rating Agency") or two other NRSROs
("Substitute Rating Agencies") to act as a Substitute Rating Agency or
Substitute Rating Agencies, as the case may be.
Any Bid by a Beneficial Owner specifying a rate per annum higher than the
Maximum Applicable Rate will be treated as a Sell Order, and any Bid by a
Potential Beneficial Owner specifying a rate per annum higher than the Maximum
Applicable Rate will not be considered. See "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" and "Acceptance and
Rejection of Submitted Bids and Submitted Sell Orders and Allocation of
Shares."
Neither the Fund nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing.
A Broker-Dealer also may hold AMPS in its own account as a Beneficial
Owner. A Broker-Dealer thus may submit Orders to the Auction Agent as a
Beneficial Owner or a Potential Beneficial Owner and therefore participate in
an Auction as an Existing Holder or Potential Holder on behalf of both itself
and its customers. Any Order placed with the Auction Agent by a Broker-Dealer
as or on behalf of a Beneficial Owner or a Potential Beneficial Owner will be
treated in the same manner as an Order placed with a Broker-Dealer by a
Beneficial Owner or a Potential Beneficial Owner. Similarly, any failure by a
Broker-Dealer to submit to the Auction Agent an Order in respect of any AMPS
held by it or its customers who are Beneficial Owners will be treated in the
same manner as a Beneficial Owner's failure to submit to its Broker-Dealer an
Order in respect of AMPS held by it, as described in the next paragraph.
Inasmuch as a Broker-Dealer participates in an Auction as an Existing Holder
or a
33
Potential Holder only to represent the interests of a Beneficial Owner or
Potential Beneficial Owner, whether it be its customers or itself, all
discussion herein relating to the consequences of an Auction for Existing
Holders and Potential Holders also applies to the underlying beneficial
ownership interests represented thereby. For information concerning the
priority given to different types of Orders placed by Existing Holders, see
"Submission of Orders by Broker-Dealers to Auction Agent." Each purchase or
sale in an Auction will be settled on the Business Day next succeeding the
Auction Date at a price per share equal to $25,000. See "Notification of
Results; Settlement" below.
If one or more Orders covering in the aggregate all of the outstanding
shares of AMPS held by a Beneficial Owner are not submitted to the Auction
Agent prior to the Submission Deadline, either because a Broker-Dealer failed
to contact such Beneficial Owner or otherwise, the Auction Agent shall deem a
Hold Order (in the case of an Auction relating to a Dividend Period which is
not a Special Dividend Period of more than 28 days) and a Sell Order (in the
case of an Auction relating to a Special Dividend Period of more than 28 days)
to have been submitted on behalf of such Beneficial Owner covering the number
of outstanding shares of AMPS held by such Beneficial Owner and not subject to
Orders submitted to the Auction Agent.
If all of the outstanding shares of AMPS are subject to Submitted Hold
Orders, the Dividend Period next succeeding the Auction automatically shall be
the same length as the immediately preceding Dividend Period, and the
Applicable Rate for the next Dividend Period for all shares of AMPS of such
series will be 60% of the Reference Rate on the date of the applicable Auction
(or 90% of such rate if the Fund has provided notification to the Auction
Agent prior to the Auction establishing the Applicable Rate for any dividend
that net capital gain or other taxable income will be included in such
dividend on shares of AMPS).
For the purposes of an Auction, shares of AMPS for which the Fund shall
have given notice of redemption and deposited moneys therefor with the Auction
Agent in trust or segregated in an account at the Fund's custodian bank for
the benefit of holders of AMPS to be redeemed and for payment to the Auction
Agent, as set forth under "Description of AMPS -- Redemption" in the statement
of additional information, will not be considered as outstanding and will not
be included in such Auction. Pursuant to the Articles Supplementary of the
Fund, the Fund will be prohibited from reissuing and its affiliates (other
than Merrill Lynch) will be prohibited from transferring (other than to the
Fund) any shares of AMPS they may acquire. Neither the Fund nor any affiliate
of the Fund may submit an Order in any Auction, except that an affiliate of
the Fund that is a Broker-Dealer (i.e., Merrill Lynch) may submit an Order.
Submission of Orders by Broker-Dealers to Auction Agent. Prior to 1:00
p.m., Eastern time, on each Auction Date, or such other time on the Auction
Date as may be specified by the Auction Agent (the "Submission Deadline"),
each Broker-Dealer will submit to the Auction Agent in writing or through a
mutually acceptable electronic means all Orders obtained by it for the Auction
to be conducted on such Auction Date, designating itself (unless otherwise
permitted by the Fund) as the Existing Holder or Potential Holder in respect
of the shares of AMPS subject to such Orders. Any Order submitted by a
Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or by a
Broker-Dealer to the Auction Agent, prior to the Submission Deadline on any
Auction Date, shall be irrevocable.
If the rate per annum specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent will round such
rate per annum up to the next highest one-thousandth (.001) of 1%.
If one or more Orders of an Existing Holder are submitted to the Auction
Agent and such Orders cover in the aggregate more than the number of
outstanding shares of AMPS held by such Existing Holder, such Orders will be
considered valid in the following order of priority:
(a) any Hold Order will be considered valid up to and including the
number of outstanding shares of AMPS held by such Existing Holder,
provided that if more than one Hold Order is submitted by such Existing
Holder and the number of shares of AMPS subject to such Hold Orders
exceeds the number of outstanding shares of AMPS held by such Existing
Holder, the number of shares of AMPS subject to each of such Hold Orders
will be reduced pro rata so that such Hold Orders, in the aggregate, will
cover exactly the number of outstanding shares of AMPS held by such
Existing Holder;
34
(b) any Bids will be considered valid, in the ascending order of
their respective rates per annum if more than one Bid is submitted by
such Existing Holder, up to and including the excess of the number of
outstanding shares of AMPS held by such Existing Holder over the number
of outstanding shares of AMPS subject to any Hold Order referred to in
clause (a) above (and if more than one Bid submitted by such Existing
Holder specifies the same rate per annum and together they cover more
than the remaining number of shares that can be the subject of valid Bids
after application of clause (a) above and of the foregoing portion of
this clause (b) to any Bid or Bids specifying a lower rate or rates per
annum, the number of shares subject to each of such Bids will be reduced
pro rata so that such Bids, in the aggregate, cover exactly such
remaining number of outstanding shares); and the number of outstanding
shares, if any, subject to Bids not valid under this clause (b) shall be
treated as the subject of a Bid by a Potential Holder; and
(c) any Sell Order will be considered valid up to and including the
excess of the number of outstanding shares of AMPS held by such Existing
Holder over the sum of the number of shares of AMPS subject to Hold
Orders referred to in clause (a) above and the number of shares of AMPS
subject to valid Bids by such Existing Holder referred to in clause (b)
above; provided that, if more than one Sell Order is submitted by any
Existing Holder and the number of shares of AMPS subject to such Sell
Orders is greater than such excess, the number of shares of AMPS subject
to each of such Sell Orders will be reduced pro rata so that such Sell
Orders, in the aggregate, will cover exactly the number of shares of AMPS
equal to such excess.
If more than one Bid of any Potential Holder is submitted in any Auction,
each Bid submitted in such Auction will be considered a separate Bid with the
rate per annum and number of shares of AMPS therein specified.
Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate. Not earlier than the Submission Deadline for each Auction,
the Auction Agent will assemble all Orders submitted or deemed submitted to it
by the Broker-Dealers (each such "Hold Order," "Bid" or "Sell Order" as
submitted or deemed submitted by a Broker-Dealer hereinafter being referred to
as a "Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as
the case may be, or as a "Submitted Order") and will determine the excess of
the number of outstanding shares of AMPS over the number of outstanding shares
of AMPS subject to Submitted Hold Orders (such excess being referred to as the
"Available AMPS") and whether Sufficient Clearing Bids have been made in such
Auction. Sufficient Clearing Bids will have been made if the number of
outstanding shares of AMPS that are the subject of Submitted Bids of Potential
Holders with rates per annum not higher than the Maximum Applicable Rate
equals or exceeds the number of outstanding shares that are the subject of
Submitted Sell Orders (including the number of shares subject to Bids of
Existing Holders specifying rates per annum higher than the Maximum Applicable
Rate).
If Sufficient Clearing Bids have been made, the Auction Agent will
determine the lowest rate per annum specified in the Submitted Bids (the
"Winning Bid Rate") which would result in the number of shares subject to
Submitted Bids specifying such rate per annum or a lower rate per annum being
at least equal to the Available AMPS. If Sufficient Clearing Bids have been
made, the Winning Bid Rate will be the Applicable Rate for the next Dividend
Period for all shares of AMPS then outstanding.
If Sufficient Clearing Bids have not been made (other than because all
outstanding shares of AMPS are the subject of Submitted Hold Orders), the
Dividend Period next following the Auction automatically will be a 7-Day
Dividend Period in the case of the Series C AMPS, and the Applicable Rate for
such Dividend Period will be equal to the Maximum Applicable Rate.
If Sufficient Clearing Bids have not been made, Beneficial Owners that
have Submitted Sell Orders will not be able to sell in the Auction all, and
may not be able to sell any, shares of AMPS subject to such Submitted Sell
Orders. See "Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares." Thus, under some circumstances, Beneficial
Owners may not have liquidity of investment.
Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares. Based on the determinations described under
"Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate" and subject to the discretion of the Auction Agent to round as described
below, Submitted Bids and Submitted Sell Orders will be accepted or rejected
in the order of priority set forth in the Auction Procedures with the result
35
that Existing Holders and Potential Holders of AMPS will sell, continue to
hold and/or purchase shares of AMPS as set forth below. Existing Holders that
submit or are deemed to have submitted Hold Orders will continue to hold the
shares of AMPS subject to such Hold Orders.
If Sufficient Clearing Bids have been made:
(a) each Existing Holder that placed a Submitted Bid specifying a
rate per annum higher than the Winning Bid Rate or a Submitted Sell Order
will sell the outstanding shares of AMPS subject to such Submitted Bid or
Submitted Sell Order;
(b) each Existing Holder that placed a Submitted Bid specifying a
rate per annum lower than the Winning Bid Rate will continue to hold the
outstanding shares of AMPS subject to such Submitted Bid;
(c) each Potential Holder that placed a Submitted Bid specifying a
rate per annum lower than the Winning Bid Rate will purchase the number
of shares of AMPS subject to such Submitted Bid;
(d) each Existing Holder that placed a Submitted Bid specifying a
rate per annum equal to the Winning Bid Rate will continue to hold the
outstanding shares of AMPS subject to such Submitted Bids, unless the
number of outstanding shares of AMPS subject to all such Submitted Bids
of Existing Holders is greater than the excess of the Available AMPS over
the number of shares of AMPS accounted for in clauses (b) and (c) above,
in which event each Existing Holder with such a Submitted Bid will sell a
number of outstanding shares of AMPS determined on a pro rata basis based
on the number of outstanding shares of AMPS subject to all such Submitted
Bids of such Existing Holders; and
(e) each Potential Holder that placed a Submitted Bid specifying a
rate per annum equal to the Winning Bid Rate will purchase any Available
AMPS not accounted for in clause (b), (c) or (d) above on a pro rata
basis based on the shares of AMPS subject to all such Submitted Bids of
Potential Holders.
If Sufficient Clearing Bids have not been made (other than because all
outstanding shares of AMPS are the subject of Submitted Hold Orders):
(a) each Existing Holder that placed a Submitted Bid specifying a
rate per annum equal to or lower than the Maximum Applicable Rate will
continue to hold the outstanding shares of AMPS subject to such Submitted
Bid;
(b) each Potential Holder that placed a Submitted Bid specifying a
rate per annum equal to or lower than the Maximum Applicable Rate will
purchase the number of shares of AMPS subject to such Submitted Bid; and
(c) each Existing Holder that placed a Submitted Bid specifying a
rate per annum higher than the Maximum Applicable Rate or a Submitted
Sell Order will sell a number of outstanding shares of AMPS determined on
a pro rata basis based on the outstanding shares of AMPS subject to all
such Submitted Bids and Submitted Sell Orders.
If as a result of the Auction Procedures described above any Existing
Holder would be entitled or required to sell, or any Potential Holder would be
entitled or required to purchase, a fraction of a share of AMPS, the Auction
Agent, in such manner as, in its sole discretion, it shall determine, will
round up or down the number of shares of AMPS being sold or purchased on such
Auction Date so that each share sold or purchased by each Existing Holder or
Potential Holder will be a whole share of AMPS. If any Potential Holder would
be entitled or required to purchase less than a whole share of AMPS, the
Auction Agent, in such manner as, in its sole discretion, it shall determine,
will allocate shares of AMPS for purchase among Potential Holders so that only
whole shares of AMPS are purchased by any such Potential Holder, even if such
allocation results in one or more of such Potential Holders not purchasing any
shares of AMPS.
36
Notification of Results; Settlement. The Auction Agent will advise each
Broker-Dealer who submitted a Bid or Sell Order in an Auction whether such Bid
or Sell Order was accepted or rejected in whole or in part and of the
Applicable Rate for the next Dividend Period for the related shares of AMPS by
telephone at approximately 3:00 P.M., Eastern time, on the Auction Date for
such Auction. Each such Broker-Dealer that submitted an Order for the account
of a customer then will advise such customer whether such Bid or Sell Order
was accepted or rejected, will confirm purchases and sales with each customer
purchasing or selling shares of AMPS as a result of the Auction and will
advise each customer purchasing or selling shares of AMPS to give instructions
to its Agent Member of the Securities Depository to pay the purchase price
against delivery of such shares or to deliver such shares against payment
therefor as appropriate. If a customer selling shares of AMPS as a result of
an Auction shall fail to instruct its Agent Member to deliver such shares, the
Broker-Dealer that submitted such customer's Bid or Sell Order will instruct
such Agent Member to deliver such shares against payment therefor. Each
Broker-Dealer that submitted a Hold Order in an Auction on behalf of a
customer also will advise such customer of the Applicable Rate for the next
Dividend Period for the AMPS. The Auction Agent will record each transfer of
shares of AMPS on the record book of Existing Holders to be maintained by the
Auction Agent. In accordance with the Securities Depository's normal
procedures, on the day after each Auction Date, the transactions described
above will be executed through the Securities Depository, and the accounts of
the respective Agent Members at the Securities Depository will be debited and
credited as necessary to effect the purchases and sales of shares of AMPS as
determined in such Auction. Purchasers will make payment through their Agent
Members in same-day funds to the Securities Depository against delivery
through their Agent Members; the Securities Depository will make payment in
accordance with its normal procedures, which now provide for payment in
same-day funds. If the procedures of the Securities Depository applicable to
AMPS shall be changed to provide for payment in next-day funds, then
purchasers may be required to make payment in next day funds. If any Existing
Holder selling shares of AMPS in an Auction fails to deliver such shares, the
Broker-Dealer of any person that was to have purchased shares of AMPS in such
Auction may deliver to such person a number of whole shares of AMPS that is
less than the number of shares that otherwise was to be purchased by such
person. In such event, the number of shares of AMPS to be so delivered will be
determined by such Broker-Dealer. Delivery of such lesser number of shares
will constitute good delivery. Each Broker-Dealer Agreement also will provide
that neither the Fund nor the Auction Agent will have responsibility or
liability with respect to the failure of a Potential Beneficial Owner,
Beneficial Owner or their respective Agent Members to deliver shares of AMPS
or to pay for shares of AMPS purchased or sold pursuant to an Auction or
otherwise.
Broker-Dealers
General. The Broker-Dealer Agreements provide that a Broker-Dealer may
submit Orders in Auctions for its own account, unless the Fund notifies all
Broker-Dealers that they no longer may do so; provided that Broker-Dealers may
continue to submit Hold Orders and Sell Orders. If a Broker-Dealer submits an
Order for its own account in any Auction of the AMPS, it may have knowledge of
Orders placed through it in that Auction and therefore have an advantage over
other Bidders, but such Broker-Dealer would not have knowledge of Orders
submitted by other Broker-Dealers in that Auction.
Merrill Lynch has advised the Fund that they and certain Broker-Dealers
and other participants in the auction rate securities markets, including both
taxable and tax exempt markets, have received a letter from the Commission
requesting that each of them voluntarily conduct an investigation regarding
their respective practices and procedures in those markets. Merrill Lynch is
cooperating fully with the Commission in this process. No assurance can be
given as to whether the results of this process will affect the market for the
AMPS or the Auctions.
Fees. The Auction Agent after each Auction will pay a service charge from
funds provided by the Fund to each Broker-Dealer on the basis of the purchase
price of shares of AMPS placed by such Broker-Dealer at such Auction. The
service charge (i) for any 7-Day Dividend Period shall be payable at the
annual rate of 0.25% of the purchase price of the shares of AMPS placed by
such Broker-Dealer in any such Auction and (ii) for any Special Dividend
Period shall be determined by mutual consent of the Fund and any such
Broker-Dealer or Broker-Dealers and shall be based upon a selling concession
that would be applicable to an underwriting of fixed or variable rate
preferred shares with a similar final maturity or variable rate dividend
period, respectively, at the commencement of the Dividend Period with respect
to such Auction. For the purposes of the preceding sentence, shares of AMPS
will be placed by a Broker-Dealer if such shares were (i) the subject of Hold
Orders deemed to have been made by Beneficial Owners that were acquired by
such Beneficial Owners through such Broker-Dealer or (ii) the subject of
37
the following Orders submitted by such Broker-Dealer: (A) a Submitted Bid of a
Beneficial Owner that resulted in such Beneficial Owner continuing to hold
such shares as a result of the Auction, (B) a Submitted Bid of a Potential
Beneficial Owner that resulted in such Potential Beneficial Owner purchasing
such shares as a result of the Auction or (C) a Submitted Hold Order.
Secondary Trading Market. The Broker-Dealers intend to maintain a
secondary trading market in the AMPS outside of Auctions; however, they have
no obligation to do so and there can be no assurance that a secondary market
for the AMPS will develop or, if it does develop, that it will provide holders
with a liquid trading market (i.e., trading will depend on the presence of
willing buyers and sellers and the trading price is subject to variables to be
determined at the time of the trade by the Broker-Dealers). The AMPS will not
be registered on any stock exchange or on any automated quotation system. An
increase in the level of interest rates, particularly during any Long Term
Dividend Period, likely will have an adverse effect on the secondary market
price of the AMPS, and a selling stockholder may sell AMPS between Auctions at
a price per share of less than $25,000.
RATING AGENCY GUIDELINES
Certain of the capitalized terms used herein not otherwise defined in
this prospectus have the meaning provided in the Glossary at the back of this
prospectus.
The Fund currently intends that, so long as shares of AMPS are
outstanding and the AMPS are rated by Moody's and S&P, the composition of its
portfolio will reflect guidelines established by Moody's and S&P in connection
with the Fund's receipt of a rating for such shares on or prior to their Date
of Original Issue of at least Aaa from Moody's and AAA from S&P. Moody's and
S&P, which are NRSROs, issue ratings for various securities reflecting the
perceived creditworthiness of such securities. The Board of Directors of the
Fund, however, may determine that it is not in the best interest of the Fund
to continue to comply with the guidelines of Moody's or S&P (described below).
If the Fund voluntarily terminates compliance with Moody's or S&P guidelines,
the Fund will no longer be required to maintain a Moody's Discounted Value or
a S&P Discounted Value, as applicable, at least equal to the AMPS Basic
Maintenance Amount. If the Fund voluntarily terminates compliance with Moody's
or S&P guidelines, or both, at the time of termination, it must continue to be
rated by at least one NRSRO.
The guidelines described below have been developed by Moody's and S&P in
connection with issuances of asset-backed and similar securities, including
debt obligations and variable rate preferred stock, generally on a
case-by-case basis through discussions with the issuers of these securities.
The guidelines are designed to ensure that assets underlying outstanding debt
or preferred stock will be varied sufficiently and will be of sufficient
quality and amount to justify investment-grade ratings. The guidelines do not
have the force of law but have been adopted by the Fund in order to satisfy
current requirements necessary for Moody's and S&P to issue the
above-described ratings for shares of AMPS, which ratings generally are relied
upon by institutional investors in purchasing such securities. The guidelines
provide a set of tests for portfolio composition and asset coverage that
supplement (and in some cases are more restrictive than) the applicable
requirements under the 1940 Act. See "Description of AMPS -- Asset
Maintenance" herein and in the statement of additional information.
The Fund intends to maintain a Discounted Value for its portfolio at
least equal to the AMPS Basic Maintenance Amount. Moody's and S&P each has
established separate guidelines for determining Discounted Value. To the
extent any particular portfolio holding does not satisfy the applicable rating
agency's guidelines, all or a portion of such holding's value will not be
included in the calculation of Discounted Value (as defined by such rating
agency). The Moody's and S&P guidelines do not impose any limitations on the
percentage of Fund assets that may be invested in holdings not eligible for
inclusion in the calculation of the Discounted Value of the Fund's portfolio.
Upon any failure to maintain the required Discounted Value, the Fund will
seek to alter the composition of its portfolio to reattain a Discounted Value
at least equal to the AMPS Basic Maintenance Amount on or prior to the AMPS
Basic Maintenance Cure Date, thereby incurring additional transaction costs
and possible losses and/or gains on dispositions of portfolio securities. To
the extent any such failure is not cured in a timely manner, shares of AMPS
will be subject to redemption. See "Description of AMPS -- Asset Maintenance"
and "Description of AMPS -- Redemption" herein and in the statement of
additional information.
38
The Fund may, but is not required to, adopt any modifications to these
guidelines that hereafter may be established by Moody's or S&P. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any rating
agency providing a rating for the shares of AMPS, at any time, may change or
withdraw any such rating. As set forth in the Articles Supplementary, the
Board of Directors, without stockholder approval, may modify certain
definitions or restrictions that have been adopted by the Fund pursuant to the
rating agency guidelines, provided the Board of Directors has obtained written
confirmation from Moody's and S&P that any such change would not impair the
ratings then assigned by Moody's and S&P to the AMPS.
As described by Moody's and S&P, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. The ratings on the AMPS are not recommendations to purchase, hold
or sell shares of AMPS, inasmuch as the ratings do not comment as to market
price or suitability for a particular investor, nor do the rating agency
guidelines described above address the likelihood that a holder of shares of
AMPS will be able to sell such shares in an Auction. The ratings are based on
current information furnished to Moody's and S&P by the Fund and the
Investment Adviser and information obtained from other sources. The ratings
may be changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information. The common stock has not been rated by a
nationally recognized statistical rating organization.
For additional information concerning the Moody's and S&P ratings
guidelines, see "Rating Agency Guidelines" in the statement of additional
information.
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS
The Investment Adviser, which is owned and controlled by Merrill Lynch &
Co. Inc. ("ML & Co."), a financial services holding company and the parent of
Merrill Lynch, provides the Fund with investment advisory and administrative
services. The Investment Adviser acts as the investment adviser to more than
100 registered investment companies and offers investment advisory services to
individuals and institutional accounts. As of May 2004, the Investment Adviser
and its affiliates, including Merrill Lynch Investment Managers, L.P.
("MLIM"), had a total of approximately $491 billion in investment company and
other portfolio assets under management, including approximately $253 billion
in fixed income assets. This amount includes assets managed by certain
affiliates of the Investment Adviser. The Investment Adviser is a limited
partnership, the partners of which are ML & Co. and Princeton Services. The
principal business address of the Investment Adviser is 800 Scudders Mill
Road, Plainsboro, New Jersey 08536.
The Investment Advisory Agreement provides that, subject to the
supervision of the Fund's Board of Directors, the Investment Adviser is
responsible for the actual management of the Fund's portfolio. The
responsibility for making decisions to buy, sell or hold a particular security
rests with the Investment Adviser, subject to review by the Board of
Directors.
The portfolio manager primarily responsible for the Fund's day-to-day
management is Theodore R. Jaeckel. Mr. Jaeckel has been a Director of MLIM
since 1997. Mr. Jaeckel has been a portfolio manager with the Investment
Adviser and MLIM since 1991 and has been the Fund's portfolio manager since
1998. The Fund's portfolio manager will consider analyses from various
sources, make the necessary investment decisions, and place orders for
transactions accordingly.
For its services, the Fund pays the Investment Adviser a monthly fee at
the annual rate of 0.50% of the Fund's average weekly net assets ("average
weekly net assets" means the average weekly value of the total assets of the
Fund, including the proceeds from the issuance of preferred stock, minus the
sum of (i) accrued liabilities of the Fund, (ii) any accrued and unpaid
interest on outstanding borrowings and (iii) accumulated dividends on shares
of preferred stock). For purposes of this calculation, average weekly net
assets is determined at the end of each month on the basis of the average net
assets of the Fund for each week during the month. The assets for each weekly
period are determined by averaging the net assets at the last business day of
a week with the net assets at the last business day of the prior week. The
liquidation preference of any outstanding preferred stock (other than
accumulated dividends) is not considered a liability in determining the Fund's
average daily net assets.
39
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Fund connected with
investment and economic research, trading and investment management of the
Fund, as well as the compensation of all Directors of the Fund who are
affiliated persons of the Investment Adviser or any of its affiliates. The
Fund pays all other expenses incurred in the operation of the Fund, including,
among other things, expenses for legal and auditing services, taxes, costs of
preparing, printing and mailing proxies, listing fees, stock certificates and
stockholder reports, charges of the custodian and the transfer agent, dividend
disbursing agent and registrar, Commission fees, fees and expenses of
non-interested Directors, accounting and pricing costs, insurance, interest,
brokerage costs, litigation and other extraordinary or non-recurring expenses,
mailing and other expenses properly payable by the Fund. Certain accounting
services are provided to the Fund by State Street Bank and Trust Company
("State Street") pursuant to an agreement between State Street and the Fund.
The Fund will pay the costs of these services. In addition, the Fund will
reimburse the Investment Adviser for certain additional accounting services.
TAXES
To the extent derived from Municipal Bond interest income, dividends on
the AMPS will be excludable from gross income for Federal income tax purposes
in the hands of holders of such AMPS, subject to the possible application of
the Federal alternative minimum tax and any state or local income taxes.
Interest income from other investments may produce taxable dividends. The Fund
is required to allocate net capital gain and other taxable income, if any,
proportionately among the common stock and AMPS and Other AMPS in accordance
with the current position of the IRS described under the heading "Taxes" in
the statement of additional information. The Fund may notify the Auction Agent
of the amount of any net capital gain or other anticipated taxable income to
be included in any dividend on the AMPS prior to the Auction establishing the
Applicable Dividend Rate for such dividend. The Auction Agent will in turn
notify holders of the AMPS and prospective purchasers. The Fund also may
include such income in a dividend on shares of AMPS without giving advance
notice thereof if it increases the dividend by an additional amount calculated
as if such income were a Retroactive Taxable Allocation and the additional
amount were an Additional Dividend. See "The Auction -- Auction Procedures --
Auction Date; Advance Notice of Allocation of Taxable Income; Inclusion of
Taxable Income in Dividends." The amount of taxable income allocable to AMPS
will depend upon the amount of such income realized by the Fund and cannot be
determined with certainty prior to the end of the Fund's fiscal year, but it
is not generally expected to be significant.
To the extent distributions are derived from interest or gains on New
Jersey Municipal Bonds, such distributions will be exempt from New Jersey
personal income tax. In order to pass through tax-exempt interest for New
Jersey personal income tax purposes, the Fund, among other requirements, must
have not less than 80% of the aggregate principal amount of its investments
invested in New Jersey Municipal Bonds at the close of each quarter of the tax
year (the "80% Test"). For purposes of calculating whether the 80% Test is
satisfied, financial options, futures, forward contracts and similar financial
instruments relating to interest-bearing obligations are excluded from the
principal amount of the Fund's investments. The Fund intends to comply with
this requirement so as to enable it to pass through interest exempt from New
Jersey personal income tax. In the event the Fund does not so comply,
distributions by the Fund may be taxable to stockholders for New Jersey
personal income tax purposes. However, regardless of whether the Fund meets
the 80% Test, all distributions attributable to interest earned on Federal
obligations will be exempt from New Jersey personal income tax. Interest on
indebtedness incurred or continued to purchase or carry Fund shares is not
deductible for New Jersey personal income tax purposes to the extent
attributable to exempt-interest dividends.
Exempt-interest dividends and gains paid to a corporate stockholder will
be subject to New Jersey corporation business (franchise) tax, and, if
applicable, the New Jersey corporation income tax, and may also be subject to
state taxes in states other than New Jersey. Accordingly, stockholders of the
Fund, including, in particular, corporate stockholders that might be subject
to the New Jersey corporation business (franchise) tax and, if applicable, the
New Jersey corporation income tax, should consult their tax advisers with
respect to the application of such taxes to an investment in the Fund, to the
receipt of Fund dividends and as to their New Jersey tax situation in general.
40
Under present New Jersey law, a RIC, such as the Fund, pays a flat tax of
$500 per year. The Fund might be subject to the New Jersey corporation
business (franchise) tax for any taxable year in which it does not qualify as
a RIC.
On February 21, 1997, the Tax Court of New Jersey ruled against the
Director of the Division of Taxation holding against the New Jersey
requirement that fund investors pay state taxes on interest their funds earned
from U.S. government securities if the 80% Test was not met. As a result of
the court decision, the State of New Jersey could be forced to pay substantial
amounts in tax refunds to state residents who are fund investors. At this
time, the effect of this litigation cannot be evaluated.
Stockholders subject to income taxation by states other than New Jersey
will realize a lower after-tax rate of return than New Jersey stockholders
because the dividends distributed by the Fund generally will not be exempt, to
any significant degree, from income taxation by such other states.
If the Fund makes a Retroactive Taxable Allocation, it will pay
Additional Dividends to holders of AMPS who are subject to the Retroactive
Taxable Allocation. See "Description of AMPS - Dividends - Additional
Dividends." The Federal income tax consequences of Additional Dividends under
existing law are uncertain. The Fund intends to treat a holder as receiving a
dividend distribution in the amount of any Additional Dividend only as and
when such Additional Dividend is paid. An Additional Dividend generally will
be designated by the Fund as an exempt-interest dividend except as otherwise
required by applicable law. However, the IRS may assert that all or part of an
Additional Dividend is a taxable dividend either in the taxable year for which
the Retroactive Taxable Allocation is made or in the taxable year in which the
Additional Dividend is paid.
Generally within 60 days after the end of the Fund's taxable year, the
Fund will tell you the amount of exempt-interest dividends and capital gain
dividends you received during that year. Capital gain dividends are taxable as
long-term capital gains to you regardless of how long you have held your
shares.
The Fund will only purchase a Municipal Bond or Non-Municipal Tax Exempt
Security if it is accompanied by an opinion of counsel to the issuer, which is
delivered on the date of issuance of the security, that the interest paid on
such security is excludable from gross income for Federal income tax purposes
and, if applicable, is exempt from New Jersey personal income tax. To the
extent that the dividends distributed by the Fund are from interest income
that is excludable from gross income for Federal income tax purposes, they are
exempt from Federal income tax. There is a possibility that events occurring
after the date of issuance of a security, or after a Fund's acquisition of a
security, may result in a determination that the interest on that security is,
in fact, includable in gross income for Federal income tax purposes
retroactively to its date of issue. Such a determination may cause a portion
of prior distributions received by stockholders, including holders of AMPS, to
be taxable to those stockholders in the year of receipt. The Fund will not pay
an Additional Dividend to a holder of AMPS under these circumstances.
Because the Fund may from time to time invest a substantial portion of
its portfolio in Municipal Bonds bearing income that could increase an AMPS
holder's tax liability under the Federal alternative minimum tax, the Fund
would not ordinarily be a suitable investment for investors who are subject to
the alternative minimum tax.
If at any time when AMPS are outstanding the Fund does not meet the asset
coverage requirements of the 1940 Act, the Fund will be required to suspend
distributions to holders of common stock until the asset coverage is restored.
See "Description of AMPS -- Dividends -- Restrictions on Dividends and Other
Payments" herein and in the statement of additional information. This may
prevent the Fund from meeting certain distribution requirements for
qualification as a RIC. Upon any failure to meet the asset coverage
requirements of the 1940 Act, the Fund, in its sole discretion, may, and under
certain circumstances will be required to, redeem AMPS in order to maintain or
restore the requisite asset coverage and avoid the adverse consequences to the
Fund and its stockholders of failing to qualify as a RIC. See "Description of
AMPS -- Redemption" herein and in the statement of additional information.
There can be no assurance, however, that any such action would achieve such
objectives.
By law, your dividends and redemption proceeds will be subject to a
withholding tax if you have not provided a tax identification number or social
security number or if the number you have provided is incorrect.
41
This section summarizes some of the consequences of an investment in the
Fund under current Federal income tax laws. It is not a substitute for
personal tax advice. Stockholders are urged to consult their tax advisers
regarding the applicability of any state or local taxes and with specific
questions regarding Federal taxes.
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 200,000,000 shares of capital stock, par
value $.10 per share, all of which shares initially were classified as common
stock. The Board of Directors is authorized, however, to classify and
reclassify any unissued shares of capital stock into one or more additional or
other classes or series as may be established from time to time by setting or
changing in any one or more respects the designations, preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of such shares of stock
and pursuant to such classification or reclassification to increase or
decrease the number of authorized shares of any existing class or series. In
this regard, the Board of Directors previously reclassified 3,900 shares of
unissued common stock as Other AMPS and has reclassified 1,100 shares of
unissued common stock as AMPS, which are being offered hereby. See
"Description of AMPS" herein and in the statement of additional information.
The following table shows the amount of (i) capital stock authorized,
(ii) capital stock held by the Fund for its own account and (iii) capital
stock outstanding for each class of authorized securities of the Fund as of
July 7, 2004.
Amount
Outstanding
(Exclusive Of
Amount Held Amount Held
By Fund For By Fund For
Amount Its Own Its Own
Title of Class Authorized Account) Account)
---------------------------------------------------------- ------------------ ---------------- -------------------
Common Stock............................................ 199,996,100 - 0 - 14,203,242
Auction Market Preferred Stock
Series A AMPS........................................ 2,400 - 0 - 2,400
Series B AMPS........................................ 1,500 - 0 - 1,500
The Fund will send unaudited reports at least semi-annually and audited
annual financial statements to all of its stockholders.
Common Stock
Holders of common stock are entitled to share equally in dividends
declared by the Board of Directors payable to holders of common stock and in
the net assets of the Fund available for distribution to holders of common
stock after payment of the preferential amounts payable to holders of any
outstanding preferred stock. Neither holders of common stock nor holders of
preferred stock have pre-emptive or conversion rights and shares of common
stock are not redeemable. The outstanding shares of common stock are fully
paid and non-assessable.
Holders of common stock are entitled to one vote for each share held and
will vote with the holders of any outstanding shares of AMPS or other
preferred stock, including the Other AMPS, on each matter submitted to a vote
of holders of common stock, except as described under "Description of AMPS --
Voting Rights" herein and in the statement of additional information.
Stockholders are entitled to one vote for each share held. The shares of
common stock, AMPS, Other AMPS and any other preferred stock do not have
cumulative voting rights, which means that the holders of more than 50% of the
shares of common stock, AMPS, Other AMPS and any other preferred stock voting
for the election of Directors can elect all of the Directors standing for
election by such holders, and, in such event, the holders of the remaining
shares of common stock, AMPS, Other AMPS and any other preferred stock will
not be able to elect any of such Directors.
42
So long as any shares of the Fund's preferred stock are outstanding,
including the AMPS and Other AMPS, holders of common stock will not be
entitled to receive any net income of or other distributions from the Fund
unless all accumulated dividends on preferred stock have been paid, and unless
asset coverage (as defined in the 1940 Act) with respect to preferred stock
would be at least 200% after giving effect to such distributions. See
"Description of AMPS -- Dividends -- Restrictions on Dividends and Other
Payments" herein and in the statement of additional information."
Preferred Stock
The Fund has issued an aggregate of 3,900 shares of Other AMPS. Under the
Articles Supplementary for the AMPS, the Fund is authorized to issue an
aggregate of 1,100 shares of AMPS. The terms of the shares of Other AMPS are
substantially the same as the terms of the shares of AMPS. See "Description of
AMPS." Under the 1940 Act, the Fund is permitted to have outstanding more than
one series of preferred stock as long as no single series has priority over
another series as to the distribution of assets of the Fund or the payment of
dividends. Neither holders of common stock nor holders of preferred stock have
pre-emptive rights to purchase any shares of AMPS, Other AMPS or any other
preferred stock that might be issued. It is anticipated that the net asset
value per share of the AMPS will equal its original purchase price per share
plus accumulated dividends per share.
Certain Provisions of the Charter and By-laws
The Fund's Charter includes provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the
Fund or to change the composition of its Board of Directors and could have the
effect of depriving common stockholders of an opportunity to sell their shares
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund. A Director may be removed from office
with or without cause but only by vote of the holders of at least 66 2/3% of
the shares entitled to vote in an election to fill that directorship. A
director elected by all of the holders of capital stock may be removed only by
action of such holders, and a director elected by the holders of AMPS and any
other preferred stock may be removed only by action of AMPS and any other
preferred stock.
In addition, the Charter requires the favorable vote of the holders of at
least 66 2/3% of the Fund's shares to approve, adopt or authorize the
following:
o a merger or consolidation or statutory share exchange of the Fund
with any other corporation;
o a sale of all or substantially all of the Fund's assets (other than
in the regular course of the Fund's investment activities); or
o a liquidation or dissolution of the Fund;
unless such action has been approved, adopted or authorized by the affirmative
vote of at least two-thirds of the total number of Directors fixed in
accordance with the By-laws, in which case the affirmative vote of a majority
of the Fund's shares of capital stock is required. The approval, adoption or
authorization of the foregoing also requires the favorable vote of a majority
of the Fund's outstanding shares of preferred stock, including the AMPS and
Other AMPS, then entitled to be voted, voting as a separate class.
In addition, conversion of the Fund to an open-end investment company
would require an amendment to the Fund's Charter. The amendment would have to
be declared advisable by the Board of Directors prior to its submission to
stockholders. Such an amendment would require the favorable vote of the
holders of at least 66 2/3% of the Fund's outstanding shares of capital stock
(including the AMPS, Other AMPS and any other preferred stock) entitled to be
voted on the matter, voting as a single class (or a majority of such shares if
the amendment was previously approved, adopted or authorized by two-thirds of
the total number of Directors fixed in accordance with the By-laws), and the
affirmative vote of a majority of outstanding shares (as defined in the 1940
Act) of preferred stock of the Fund (including the AMPS and Other AMPS),
voting as a separate class. Such a vote also would satisfy a separate
requirement in the 1940 Act that the change be approved by the stockholders.
Stockholders of an open-end investment company may require the company to
redeem their shares of common stock at any time (except in
43
certain circumstances as authorized by or under the 1940 Act) at their net
asset value, less such redemption charge, if any, as might be in effect at the
time of a redemption. If the Fund is converted to an open-end investment
company, it could be required to liquidate portfolio securities to meet
requests for redemption, and the common stock would no longer be listed on a
stock exchange. Conversion to an open-end investment company would also
require redemption of all outstanding shares of preferred stock (including the
AMPS and Other AMPS) and would require changes in certain of the Fund's
investment policies and restrictions, such as those relating to the issuance
of senior securities, the borrowing of money and the purchase of illiquid
securities.
The Charter and By-laws provide that the Board of Directors has the power
to make, alter or repeal any of the By-laws (except for any By-law specified
not to be amended or repealed by the Board), subject to the requirements of
the 1940 Act. Neither this provision of the Charter, nor any of the foregoing
provisions of the Charter requiring the affirmative vote of 66 2/3% of shares
of capital stock of the Fund, can be amended or repealed except by the vote of
such required number of shares.
The Board of Directors has determined that the 66 2/3% voting
requirements described above, which are greater than the minimum requirements
under Maryland law or the 1940 Act, are in the best interests of stockholders
generally. Reference should be made to the Charter on file with the Commission
for the full text of these provisions.
CUSTODIAN
The Fund's securities and cash are held under a custodian agreement with
The Bank of New York, 101 Barclay Street, New York, New York 10286.
44
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter")
has agreed, subject to the terms and conditions contained in a purchase
agreement with the Fund and the Investment Adviser, to purchase from the Fund
all of the shares of AMPS offered hereby. The Underwriter has agreed to
purchase all such shares if any are purchased.
The Fund and the Investment Adviser have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the
Underwriter may be required to make in respect of those liabilities.
The Underwriter is offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
its counsel, including the validity of the shares, and other conditions
contained in the purchase agreement, such as the receipt by the Underwriter of
officer's certificates and legal opinions. The Underwriter reserves the right
to withdraw, cancel or modify offers to the public and to reject orders in
whole or in part.
Commissions and Discounts
The Underwriter has advised the Fund that it proposes initially to offer
the shares of AMPS to the public at the initial public offering price on the
cover page of this prospectus and to dealers at that price less a concession
not in excess of $137.50 per share. There is a sales charge or underwriting
discount of $250 per share, which is equal to 1% of the initial public
offering price per share. After the initial public offering, the public
offering price and concession may be changed. Investors must pay for any AMPS
purchased in the offering on or before , 2004.
The expenses of the offering, excluding underwriting discount, are
estimated at $135,000 and are payable by the Fund.
Other Relationships
Merrill Lynch acts in Auctions as a Broker-Dealer as set forth under "The
Auction -- General -- Broker-Dealer Agreements" and will be entitled to fees
for services as a Broker-Dealer as set forth under "The Auction --
Broker-Dealers." Merrill Lynch also may provide information to be used in
ascertaining the Reference Rate.
The Fund also anticipates that Merrill Lynch may from time to time act as
a broker in connection with the execution of its portfolio transactions. See
"Portfolio Transactions" in the statement of additional information. Merrill
Lynch is an affiliate of the Investment Adviser. See "Investment Restrictions"
and "Portfolio Transactions" in the statement of additional information.
The address of the Underwriter is 4 World Financial Center, New York, New
York 10080.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the
Fund's shares of common stock, AMPS and Other AMPS is The Bank of New York,
101 Barclay Street, New York, New York 10286.
ACCOUNTING SERVICES PROVIDER
State Street Bank and Trust Company, 500 College Road East, Princeton,
New Jersey 08540, provides certain accounting services for the Fund.
45
LEGAL OPINIONS
Certain legal matters in connection with the AMPS offered hereby are
passed on for the Fund and the Underwriter by Sidley Austin Brown & Wood LLP,
New York, New York 10019.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND EXPERTS
________________ is the Fund's independent registered public accounting
firm. The audited financial statements of the Fund and certain of the
information appearing under the caption "Financial Highlights" included in
this prospectus have been audited by _______________ for the periods indicated
in its report with respect thereto, and are included in reliance upon such
report and upon the authority of such firm as experts in accounting and
auditing. ________________ has an office at ______________________________.
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and in accordance therewith is required
to file reports, proxy statements and other information with the Commission.
Any such reports and other information, including the Fund's Code of Ethics,
can be inspected and copied at the public reference facilities of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. Information on the operation of such public reference facilities
may be obtained by calling the Commission at 1-202-942-8090. Copies of such
materials can be obtained from the public reference section of the Commission
by writing at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates, or by electronic request at publicinfo@sec.gov. The Commission
maintains a Web site at http://www.sec.gov containing reports and information
statements and other information regarding registrants, including the Fund,
that file electronically with the Commission. Reports, proxy statements and
other information concerning the Fund can also be inspected at the offices of
the New York Stock Exchange.
Additional information regarding the Fund is contained in the
Registration Statement on Form N-2, including amendments, exhibits and
schedules thereto, relating to such shares filed by the Fund with the
Commission in Washington, D.C. This prospectus does not contain all of the
information set forth in the Registration Statement, including any amendments,
exhibits and schedules thereto. For further information with respect to the
Fund and the shares offered hereby, reference is made to the Registration
Statement. Statements contained in this prospectus as to the contents of any
contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement may be inspected without charge at the Commission's principal office
in Washington, D.C., and copies of all or any part thereof may be obtained
from the Commission upon the payment of certain fees prescribed by the
Commission.
46
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
Page
----
Investment Objective and Policies.................................................................................3
Investment Restrictions...........................................................................................3
Description of AMPS...............................................................................................5
The Auction......................................................................................................12
Rating Agency Guidelines.........................................................................................13
Directors and Officers...........................................................................................21
Investment Advisory and Management Arrangements..................................................................27
Portfolio Transactions...........................................................................................32
Taxes............................................................................................................34
Net Asset Value..................................................................................................39
Financial Statements.............................................................................................40
APPENDIX A Economic and Other Conditions in New Jersey.........................................................A-1
APPENDIX B Description of Municipal Bond Ratings...............................................................B-1
APPENDIX C Settlement Procedures...............................................................................C-1
APPENDIX D Auction Procedures..................................................................................D-1
47
GLOSSARY
"Additional Dividend" has the meaning set forth on page [26] of this
prospectus.
"Agent Member" means the member of the Securities Depository that will
act on behalf of a Beneficial Owner of one or more shares of AMPS or on behalf
of a Potential Beneficial Owner.
"AMPS" means the Auction Market Preferred Stock, Series C, with a par
value of $.10 per share and a liquidation preference of $25,000 per share plus
an amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared) of the Fund.
"AMPS Basic Maintenance Amount" has the meaning set forth on page [27] of
this prospectus.
"AMPS Basic Maintenance Cure Date" has the meaning set forth on page [27]
of this prospectus.
"AMPS Basic Maintenance Report" has the meaning set forth on page [10] of
the statement of additional information.
"Anticipation Notes" shall mean the following New Jersey Municipal Bonds:
revenue anticipation notes, tax anticipation notes, tax and revenue
anticipation notes, grant anticipation notes and bond anticipation notes.
"Applicable Percentage" has the meaning set forth on page [31] of this
prospectus.
"Applicable Rate" means the rate per annum at which cash dividends are
payable on shares of AMPS for any Dividend Period.
"Applicable Spread" has the meaning set forth on page [31] of this
prospectus.
"Articles Supplementary" means the Articles Supplementary of the Fund
specifying the powers, preferences and rights of the shares of the AMPS.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means The Bank of New York unless and until another
commercial bank, trust company or other financial institution appointed by a
resolution of the Board of Directors of the Fund or a duly authorized
committee thereof enters into an agreement with the Fund to follow the Auction
Procedures for the purpose of determining the Applicable Rate and to act as
transfer agent, registrar, dividend disbursing agent and redemption agent for
the AMPS.
"Auction Agent Agreement" means the agreement entered into between the
Fund and the Auction Agent which provides, among other things, that the
Auction Agent will follow the Auction Procedures for the purpose of
determining the Applicable Rate.
"Auction Date" has the meaning set forth on page [30] of this prospectus.
"Auction Procedures" means the procedures for conducting Auctions set
forth in Appendix D to the statement of additional information.
"Available AMPS" has the meaning set forth on page [33] of this
prospectus.
"Beneficial Owner" means a customer of a Broker-Dealer who is listed on
the records of that Broker- Dealer (or if applicable, the Auction Agent) as a
holder of shares of AMPS or a Broker-Dealer that holds AMPS for its own
account.
"Bid" has the meaning set forth on page [33] of this prospectus.
48
"Bidder" has the meaning set forth on page [31] of this prospectus.
"Board of Directors" or "Board" means the Board of Directors of the Fund.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law
to perform the functions required of a Broker-Dealer in the Auction
Procedures, that has been selected by the Fund and has entered into a
Broker-Dealer Agreement with the Auction Agent that remains effective.
"Broker-Dealer Agreement" means an agreement entered into between the
Auction Agent and a Broker-Dealer, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated, pursuant to which such Broker-Dealer agrees to follow the
Auction Procedures.
"Business Day" means a day on which the New York Stock Exchange is open
for trading and which is not a Saturday, Sunday or other day on which banks in
The City of New York are authorized or obligated by law to close.
"Cede" means Cede & Co., the nominee of DTC, and in whose name the shares
of AMPS initially will be registered.
"Charter" means the Articles of Incorporation, as amended and
supplemented (including the Articles Supplementary and the Other AMPS Articles
Supplementary), of the Fund.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common stock" means the common stock, par value $.10 per share, of the
Fund.
"Date of Original Issue" means, with respect to each share of AMPS, the
date on which such share first is issued by the Fund.
"Deposit Securities" means cash and Municipal Bonds rated at least A2
(having a remaining maturity of 12 months or less), P-1, VMIG-1 or MIG-1 by
Moody's or A (having a remaining maturity of 12 months or less), A-1+ or SP-1+
by S&P or A (having a remaining maturity of 12 months or less) or F-1+ by
Fitch.
"Discount Factor" means a Moody's Discount Factor or an S&P Discount
Factor, as the case may be.
"Discounted Value" means (i) with respect to an S&P Eligible Asset, the
quotient of the fair market value thereof divided by the applicable S&P
Discount Factor and (ii) with respect to a Moody's Eligible Asset, the lower
of par and the quotient of the fair market value thereof divided by the
applicable Moody's Discount Factor.
"Dividend Payment Date" has the meaning set forth on page [25] of this
prospectus.
"Dividend Period" has the meaning set forth on page [25] of this
prospectus.
"DTC" means The Depository Trust Company.
"Eligible Assets" means Moody's Eligible Assets or S&P Eligible Assets,
as the case may be.
"Existing Holder" means a Broker-Dealer or any such other person as may
be permitted by the Fund that is listed as the holder of record of shares of
AMPS in the records of the Auction Agent.
"Fitch" means Fitch Ratings or its successors.
"Forward Commitment" has the meaning set forth on page [20] of the
statement of additional information.
"Fund" means MuniYield New Jersey Fund, Inc., a Maryland corporation that
is the issuer of the AMPS.
49
"High Yield Municipal Bonds" means (a) with respect to Moody's (1) New
Jersey Municipal Bonds and Municipal Bonds rated Ba1 to B3 by Moody's, (2) New
Jersey Municipal Bonds and Municipal Bonds not rated by Moody's, but rated BB+
to B- by S&P or Fitch, and (3) New Jersey Municipal Bonds and Municipal Bonds
not explicitly rated by Moody's, S&P or Fitch, but rated at least the
equivalent of B3 internally by the Investment Adviser, provided that Moody's
reviews and achieves sufficient comfort with the Investment Adviser's internal
credit rating processes, and (b) with respect to S&P (1) New Jersey Municipal
Bonds not rated by S&P but rated equivalent to BBB+ or lower by another NRSRO
and (2) New Jersey Municipal Bonds rated BB+ or lower by S&P.
"Hold Order" has the meaning set forth on page [30] of this prospectus.
"Initial Dividend Payment Date" means the first Dividend Payment Date for
the Series C AMPS.
"Initial Dividend Period" means the period from and including the Date of
Original Issue to but excluding the Initial Dividend Payment Date for the
Series C AMPS.
"Initial Margin" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a financial
futures contract.
"Inverse Floaters" means trust certificates or other instruments
evidencing interests in one or more New Jersey Municipal Bonds or Municipal
Bonds that qualify as (i) S&P Eligible Assets the interest rates on which are
adjusted at short term intervals on a basis that is inverse to the
simultaneous readjustment of the interest rates on corresponding floating rate
trust certificates or other instruments issued by the same issuer, provided
that the ratio of the aggregate dollar amount of floating rate instruments to
inverse floating rate instruments issued by the same issuer does not exceed
one to one at their time of original issuance unless the floating rate
instrument has only one reset remaining until maturity or (ii) Moody's
Eligible Assets the interest rates on which are adjusted at short term
intervals on a basis that is inverse to the simultaneous readjustment of the
interest rates on corresponding floating rate trust certificates or other
instruments issued by the same issuer, provided that (a) such Inverse Floaters
are rated by Moody's with the Investment Adviser having the capability to
collapse (or relink) within seven days as a liquidity enhancement measure, and
(b) the issuer of such Inverse Floaters employs a leverage factor (i.e., the
ratio of underlying capital appreciation bonds or other instruments to
residual long-term derivative instruments) of not more than 2:1.
"Investment Adviser" means Fund Asset Management, L.P.
"IRS" means the United States Internal Revenue Service.
"LIBOR Dealer" means Merrill Lynch, Pierce, Fenner & Smith Incorporated
and such other dealer or dealers as the Fund from time to time may appoint or,
in lieu thereof, their respective affiliates and successors.
"LIBOR Rate," on any Auction Date, means (i) the rate for deposits in
U.S. dollars for the designated Dividend Period, which appears on display page
3750 of Moneyline's Telerate Service ("Telerate Page 3750") (or such other
page as may replace that page on that service, or such other service as may be
selected by the LIBOR Dealer or its successors that are LIBOR Dealers) as of
11:00 a.m., London time, on the day that is the London Business Day preceding
the Auction Date (the "LIBOR Determination Date"), or (ii) if such rate does
not appear on Telerate Page 3750 or such other page as may replace such
Telerate Page 3750, (A) the LIBOR Dealer shall determine the arithmetic mean
of the offered quotations of the Reference Banks to leading banks in the
London interbank market for deposits in U.S. dollars for the designated
Dividend Period in an amount determined by such LIBOR Dealer by reference to
requests for quotations as of approximately 11:00 a.m. (London time) on such
date made by such LIBOR Dealer to the Reference Banks, (B) if at least two of
the Reference Banks provide such quotations, LIBOR Rate shall equal such
arithmetic mean of such quotations, (C) if only one or none of the Reference
Banks provide such quotations, LIBOR Rate shall be deemed to be the arithmetic
mean of the offered quotations that leading banks in The City of New York
selected by the LIBOR Dealer (after obtaining the Fund's approval) are quoting
on the relevant LIBOR Determination Date for deposits in U.S. dollars for the
designated Dividend Period in an amount determined by the LIBOR Dealer (after
obtaining the Fund's approval) that is representative of a single transaction
in such market at such time by reference to the principal London offices of
50
leading banks in the London interbank market; provided, however, that if one
of the LIBOR Dealers does not quote a rate required to determine the LIBOR
Rate, the LIBOR Rate will be determined on the basis of the quotation or
quotations furnished by any Substitute LIBOR Dealer or Substitute LIBOR
Dealers selected by the Fund to provide such rate or rates not being supplied
by the LIBOR Dealer; provided further, that if the LIBOR Dealer and Substitute
LIBOR Dealers are required but unable to determine a rate in accordance with
at least one of the procedures provided above, the LIBOR Rate shall be the
LIBOR Rate as determined on the previous Auction Date. If the number of
Dividend Period days shall be (i) 7 or more but fewer than 21 days, such rate
shall be the seven-day LIBOR rate; (ii) more than 21 but fewer than 49 days,
such rate shall be the one-month LIBOR rate; (iii) 49 or more but fewer than
77 days, such rate shall be the two-month LIBOR rate; (iv) 77 or more but
fewer than 112 days, such rate shall be the three-month LIBOR rate; (v) 112 or
more but fewer than 140 days, such rate shall be the four-month LIBOR rate;
(vi) 140 or more but fewer than 168 days, such rate shall be the five-month
LIBOR rate; (vii) 168 or more but fewer than 189 days, such rate shall be the
six-month LIBOR rate; (viii) 189 or more but fewer than 217 days, such rate
shall be the seven-month LIBOR rate; (ix) 217 or more but fewer than 252 days,
such rate shall be the eight-month LIBOR rate; (x) 252 or more but fewer than
287 days, such rate shall be the nine-month LIBOR rate; (xi) 287 or more but
fewer than 315 days, such rate shall be the ten-month LIBOR rate; (xii) 315 or
more but fewer than 343 days, such rate shall be the eleven-month LIBOR rate;
and (xiii) 343 or more but fewer than 365 days, such rate shall be the
twelve-month LIBOR rate.
"London Business Day" means any day on which commercial banks are
generally open for business in London.
"Long Term Dividend Period" means a Special Dividend Period consisting of
a specified period of one whole year or more but not greater than five years.
"Mandatory Redemption Price" has the meaning set forth on page [28] of
this prospectus.
"Marginal Tax Rate" means the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate, whichever is greater.
"Maximum Applicable Rate" has the meaning set forth on page [31] of this
prospectus.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" has the meaning set forth on pages [16 to 17]
of the statement of additional information.
"Moody's Eligible Assets" has the meaning set forth on pages [17 to 18]
of the statement of additional information.
"Moody's Hedging Transactions" has the meaning set forth on page [18] of
the statement of additional information.
"Moody's Volatility Factor" means 272% as long as there has been no
increase enacted to the Marginal Tax Rate. If such an increase is enacted but
not yet implemented, the Moody's Volatility Factor shall be as follows:
% Change in Moody's Volatility
Marginal Tax Rate Factor
------------------------------------------------ --------------------
<=5%.......................................... 292%
>5% but <= 10%................................ 313%
>10% but <= 15%............................... 338%
>15% but <= 20%............................... 364%
>20% but <= 25%............................... 396%
>25% but <= 30%............................... 432%
>30% but <= 35%............................... 472%
>35% but <= 40%............................... 520%
51
Notwithstanding the foregoing, the Moody's Volatility Factor may mean
such other potential dividend rate increase factor as Moody's advises the Fund
in writing is applicable.
"Municipal Bonds" has the meaning set forth on page [12] of this
prospectus.
"Municipal Index" has the meaning set forth on page [15] of the statement
of additional information.
"New Jersey Municipal Bonds" has the meaning set forth on page [13] of
this prospectus.
"1940 Act" means the Investment Company Act of 1940, as amended from time
to time.
"1940 Act AMPS Asset Coverage" has the meaning set forth on page [27] of
this prospectus.
"1940 Act Cure Date" has the meaning set forth on page [27] of this
prospectus.
"Non-Call Period" has the meaning set forth under "Specific Redemption
Provisions" below.
"Non-Payment Period" has the meaning set forth on page [8] of the
statement of additional information.
"Non-Payment Period Rate" has the meaning set forth on page [8] of the
statement of additional information.
"Normal Dividend Payment Date" has the meaning set forth on page [24] of
this prospectus.
"Notice of Revocation" has the meaning set forth on page [7] of the
statement of additional information.
"Notice of Special Dividend Period" has the meaning set forth on page
[26] of this prospectus.
"NRSRO" means any nationally recognized statistical rating organization,
as that term is used in Rule 15a3-1 under the Securities and Exchange Act of
1934, as amended, or any successor provisions.
"Optional Redemption Price" has the meaning set forth on page [28] of
this prospectus.
"Order" has the meaning set forth on page [31] of this prospectus.
"Other AMPS" means the Auction Market Preferred Stock, Series A; and the
Auction Market Preferred Stock, Series B, each with a liquidation preference
of $25,000 per share plus an amount equal to accumulated but unpaid dividends
thereon (whether or not earned or declared) of the Fund.
"Other AMPS Articles Supplementary" means the Articles Supplementary, as
amended and supplemented, of the Fund specifying the powers, preferences and
rights of the shares of the Other AMPS.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of shares of AMPS but that wishes
to purchase such shares, or that is a Beneficial Owner that wishes to purchase
additional shares of AMPS.
"Potential Holder" means any Broker-Dealer or any such other person as
may be permitted by the Fund, including any Existing Holder, who may be
interested in acquiring shares of AMPS (or, in the case of an Existing Holder,
additional shares of AMPS).
"Preferred stock" means preferred stock of the Fund and includes the
AMPS.
"Premium Call Period" has the meaning set forth under "Specific
Redemption Provisions" below.
52
"Receivables for New Jersey Municipal Bonds Sold" has the meaning set
forth under the definition of "S&P Discount Factor."
"Receivables for New Jersey Municipal Bonds and Municipal Bonds Sold" has
the meaning set forth under the definition of "Moody's Discount Factor."
"Reference Banks" means four major banks in the London interbank market
selected by Merrill Lynch, Pierce, Fenner & Smith Incorporated or its
affiliates or successors or such other party as the Fund may from time to time
appoint.
"Reference Rate" means: (i) with respect to a Dividend Period having 364
or fewer days, the higher of the applicable LIBOR Rate and the Taxable
Equivalent of the Short Term Municipal Bond Rate, or (ii) with respect to any
Dividend Period having 365 or more days, the applicable Treasury Index Rate.
"Request for Special Dividend Period" has the meaning set forth on page
[25] of this prospectus.
"Response" has the meaning set forth on page [26] of this prospectus.
"Retroactive Taxable Allocation" has the meaning set forth on page [26]
of this prospectus.
"Rule 2a-7 Money Market Funds" means investment companies registered
under the 1940 Act that comply with the requirements of Rule 2a-7 thereunder.
"S&P" means Standard & Poor's or its successors.
"S&P Discount Factor" has the meaning set forth on pages [14 to 15]of the
statement of additional information.
"S&P Eligible Assets" has the meaning set forth on pages [15 to 16] of
the statement of additional information.
"S&P Hedging Transactions" has the meaning set forth on page [15] of the
statement of additional information.
"S&P Volatility Factor" means 277% or such other potential dividend rate
increase factor as S&P advises the Fund in writing is applicable.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by the
Fund that agrees to follow the procedures required to be followed by such
securities depository in connection with shares of AMPS.
"Sell Order" has the meaning specified in Subsection 10(b)(i) of the
Auction Procedures.
"Series C AMPS" means the Auction Market Preferred Stock, Series C, with
a par value of $.10 per share and a liquidation preference of $25,000 per
share plus an amount equal to accumulated but unpaid dividends thereon
(whether or not earned or declared), of the Fund.
"7-Day Dividend Period" means a Dividend Period consisting of seven days.
"Short Term Dividend Period" means a Special Dividend Period consisting
of a specified number of days (other than seven) evenly divisible by seven,
and not fewer than seven days nor more than 364 days.
"Special Dividend Period" has the meaning set forth on page [24] of this
prospectus.
53
"Specific Redemption Provisions" means, with respect to a Special
Dividend Period, either, or any combination of, (i) a period (a "Non-Call
Period") determined by the Board of Directors of the Fund, after consultation
with the Auction Agent and the Broker-Dealers, during which the shares of AMPS
subject to such Dividend Period shall not be subject to redemption at the
option of the Fund and (ii) a period (a "Premium Call Period"), consisting of
a number of whole years and determined by the Board of Directors of the Fund,
after consultation with the Auction Agent and the Broker-Dealers, during each
year of which the shares of AMPS subject to such Dividend Period shall be
redeemable at the Fund's option at a price per share equal to $25,000 plus
accumulated but unpaid dividends plus a premium expressed as a percentage of
$25,000, as determined by the Board of Directors of the Fund after
consultation with the Auction Agent and the Broker-Dealers.
"Submission Deadline" has the meaning set forth on page [32[ of this
prospectus.
"Submitted Bid" has the meaning set forth on page [33] of this
prospectus.
"Submitted Hold Order" has the meaning set forth on page [33] of this
prospectus.
"Submitted Order" has the meaning set forth on page [33] of this
prospectus.
"Submitted Sell Order" has the meaning set forth on page [33] of this
prospectus.
"Subsequent Dividend Period" means each Dividend Period after the Initial
Dividend Period.
"Substitute Rating Agency" and "Substitute Rating Agencies" shall mean an
NRSRO or two NRSROs, respectively, selected by Merrill Lynch, Pierce, Fenner &
Smith Incorporated, or its respective affiliates and successors, after
obtaining the Fund's approval, to act as a substitute rating agency or
substitute rating agencies, as the case may be, to determine the credit
ratings of the AMPS.
"Sufficient Clearing Bids" has the meaning set forth on page [33] of this
prospectus.
"Taxable Equivalent of the Short Term Municipal Bond Rate" on any date
means 90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30-day High Grade Index (the "Kenny
Index") or any successor index, made available for the Business Day
immediately preceding such date but in any event not later than 8:30 A.M.,
Eastern time, on such date by Kenny Information Systems Inc. or any successor
thereto, based upon 30-day yield evaluations at par of bonds the interest on
which is excludable for regular Federal income tax purposes under the Code of
"high grade" component issuers selected by Kenny Information Systems Inc. or
any such successor from time to time in its discretion, which component
issuers shall include, without limitation, issuers of general obligation bonds
but shall exclude any bonds the interest on which constitutes an item of tax
preference under Section 57(a)(5) of the Code, or successor provisions, for
purposes of the "alternative minimum tax," divided by (B) 1.00 minus the
Marginal Tax Rate (expressed as a decimal); provided, however, that if the
Kenny Index is not made so available by 8:30 A.M., Eastern time, on such date
by Kenny Information Systems Inc. or any successor, the Taxable Equivalent of
the Short Term Municipal Bond Rate shall mean the quotient of (A) the per
annum rate expressed on an interest equivalent basis equal to the most recent
Kenny Index so made available for any preceding Business Day, divided by (B)
1.00 minus the Marginal Tax Rate (expressed as a decimal). The Fund may not
utilize a successor index to the Kenny Index unless Moody's and S&P provide
the Fund with written confirmation that the use of such successor index will
not adversely affect the then-current respective Moody's and S&P ratings of
the AMPS.
"Treasury Bonds" means U.S. Treasury Bonds or Notes.
"Treasury Index Rate" means the average yield to maturity for actively
traded marketable fixed interest rate U.S. Treasury Securities having the same
number of 30-day periods to maturity as the length of the applicable Dividend
Period, determined, to the extent necessary, by linear interpolation based
upon the yield for such securities having the next shorter and next longer
number of 30-day periods to maturity treating all Dividend Periods with a
length greater than the longest maturity for such securities as having a
length equal to such longest maturity, in all cases based upon data set forth
in the most recent weekly statistical release published by the Board of
Governors of
54
the Federal Reserve System (currently in H.15(519)); provided, however, if the
most recent such statistical release shall not have been published during the
15 days preceding the date of computation, the foregoing computations shall be
based upon the average of comparable data as quoted to the Fund by at least
three recognized dealers in U.S. Government Securities selected by the Fund.
"U.S. Treasury Securities" means direct obligations of the United States
Treasury that are entitled to the full faith and credit of the United States
government.
"Valuation Date" has the meaning set forth on page [27] of this
prospectus.
"Variation Margin" means, in connection with an outstanding futures
contract owned or sold by the Fund, the amount of cash or securities paid to
or received from a broker (subsequent to the Initial Margin payment) from time
to time as the price of such futures contract fluctuates.
"Winning Bid Rate" has the meaning set forth on page [33] of this
prospectus.
55
==============================================================================
$27,500,000
MuniYield New Jersey Fund, Inc.
Auction Market Preferred Stock ("AMPS")
1,100 Shares, Series C
Liquidation Preference $25,000 Per Share
-------------------------
PROSPECTUS
-------------------------
Merrill Lynch & Co.
, 2004 CODE # -0804
==============================================================================
The information in this statement of additional information is not complete
and may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
statement of additional information is not a prospectus.
Subject to Completion
Preliminary Statement of Additional Information Dated July 13, 2004
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
$27,500,000
MuniYield New Jersey Fund, Inc.
Auction Market Preferred Stock ("AMPS")
1,100 Shares, Series C
Liquidation Preference $25,000 Per Share
------------------
MuniYield New Jersey Fund, Inc. (the "Fund") is a non-diversified,
closed-end fund. The investment objective of the Fund is to provide
shareholders with as high a level of current income exempt from Federal income
taxes and New Jersey personal income tax as is consistent with its investment
policies and prudent investment management. The Fund seeks to achieve its
investment objective by investing, as a fundamental policy, at least 80% of an
aggregate of the Fund's net assets (including proceeds from the issuance of
any preferred stock), and the proceeds of any borrowings for investment
purposes, in a portfolio of municipal obligations the interest on which, in
the opinion of bond counsel to the issuer, is excludable from gross income for
Federal income tax purposes (except that the interest may be includable in
taxable income for purposes of the Federal alternative minimum tax) and exempt
from New Jersey personal income tax. Under normal market conditions, the Fund
invests primarily in long term municipal obligations that are rated investment
grade or, if unrated, are considered by the Fund's investment adviser to be of
comparable quality. The Fund may invest in certain tax exempt securities
classified as "private activity bonds," as discussed within, that may subject
certain investors in the Fund to an alternative minimum tax. There can be no
assurance that the Fund's investment objective will be realized.
Certain capitalized terms not otherwise defined in this statement of
additional information have the meaning provided in the Glossary included as
part of the prospectus.
This statement of additional information is not a prospectus, but should
be read in conjunction with the prospectus of the Fund, which has been filed
with the Securities and Exchange Commission (the "Commission") and can be
obtained, without charge, by calling (800) 543-6217. The prospectus is
incorporated by reference into this statement of additional information, and
this statement of additional information is incorporated by reference into the
prospectus.
------------------
Merrill Lynch & Co.
------------------
The date of this statement of additional information is , 2004.
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
Page
----
Investment Objective and Policies.................................................................................3
Investment Restrictions...........................................................................................3
Description of AMPS...............................................................................................5
The Auction......................................................................................................12
Rating Agency Guidelines.........................................................................................13
Directors and Officers...........................................................................................21
Investment Advisory and Management Arrangements..................................................................27
Portfolio Transactions...........................................................................................32
Taxes ..........................................................................................................34
Net Asset Value..................................................................................................39
Financial Statements.............................................................................................40
APPENDIX A Economic and Other Conditions in New Jersey.........................................................A-1
APPENDIX B Description of Municipal Bond Ratings...............................................................B-1
APPENDIX C Settlement Procedures...............................................................................C-1
APPENDIX D Auction Procedures..................................................................................D-1
2
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide shareholders with as high a
level of current income exempt from Federal income taxes and New Jersey
personal income tax as is consistent with its investment policies and prudent
investment management. The Fund seeks to achieve its investment objective by
investing at least 80% of an aggregate of the Fund's net assets (including
proceeds from the issuance of any preferred stock) and the proceeds of any
borrowings for investment purposes, in a portfolio of municipal obligations
issued by or on behalf of the State of New Jersey, its political subdivisions,
agencies and instrumentalities and by other qualifying issuers, each of which
pays interest that, in the opinion of bond counsel to the issuer, is
excludable from gross income for Federal income tax purposes(except that the
interest may be includable in taxable income for purposes of the Federal
alternative minimum tax) and New Jersey personal income tax ("New Jersey
Municipal Bonds"). The Fund also may invest in municipal obligations issued by
or on behalf of states, territories and possessions of the United States and
their political subdivisions, agencies or instrumentalities, each of which
pays interest that, in the opinion of bond counsel to the issuer, is
excludable from gross income for Federal income tax purposes but is not exempt
from gross income for New Jersey personal income tax purposes ("Municipal
Bonds"). Unless otherwise noted, the term "Municipal Bonds" also includes New
Jersey Municipal Bonds. The Fund typically invests at least 80% of its total
assets in New Jersey Municipal Bonds. The Fund's investment objective and its
policy of investing at least 80% of an aggregate of the Fund's net assets
(including proceeds from the issuance of any preferred stock) and the proceeds
of any borrowings for investment purposes, in New Jersey Municipal Bonds are
fundamental policies that may not be changed without the approval of a
majority of the outstanding voting securities of the Fund (as defined in the
1940 Act). There can be no assurance that the Fund's investment objective will
be realized.
Reference is made to "Investment Objective and Policies" and "Other
Investment Policies" in the prospectus for information regarding other types
of securities that the Fund may invest in to achieve its objective.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and may
not be changed without the approval of the holders of a majority of the Fund's
outstanding shares of common stock and outstanding shares of AMPS, Other AMPS
and any other preferred stock, voting together as a single class, and a
majority of the outstanding shares of AMPS, Other AMPS and any other preferred
stock, voting as a separate class (which for this purpose and under the 1940
Act means the lesser of (i) 67% of the shares of each class of capital stock
represented at a meeting at which more than 50% of the outstanding shares of
each class of capital stock are represented or (ii) more than 50% of the
outstanding shares of each class of capital stock). The Fund may not:
1. Make investments for the purpose of exercising control or
management.
2. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization,
or by purchase in the open market of securities of closed-end investment
companies and only if immediately thereafter no more than 10% of the
Fund's total assets would be invested in such securities.
3. Purchase or sell real estate, real estate limited partnerships,
commodities or commodity contracts; provided that the Fund may invest in
securities secured by real estate or interests therein or issued by
companies that invest in real estate or interests therein and the Fund
may purchase and sell financial futures contracts and options thereon.
4. Issue senior securities other than preferred stock or borrow in
excess of 5% of its total assets taken at market value; provided,
however, that the Fund is authorized to borrow moneys in excess of 5% of
the value of its total assets for the purpose of repurchasing shares of
common stock or redeeming shares of preferred stock.
5. Underwrite securities of other issuers except insofar as the
Fund may be deemed an underwriter under the Securities Act of 1933, as
amended, in selling portfolio securities.
3
6. Make loans to other persons, except that the Fund may purchase
New Jersey Municipal Bonds, Municipal Bonds and other debt securities in
accordance with its investment objective, policies and limitations.
7. Purchase any securities on margin, except that the Fund may
obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities (the deposit or payment by
the Fund or initial or variation margin in connection with financial
futures contracts and options thereon is not considered the purchase of a
security on margin).
8. Make short sales of securities or maintain a short position or
invest in put, call, straddle or spread options, except that the Fund may
write, purchase and sell options and futures on New Jersey Municipal
Bonds, Municipal Bonds, U.S. Government obligations and related indices
or otherwise in connection with bona fide hedging activities.
9. Invest more than 25% of its total assets (taken at market value
at the time of each investment) in securities of issuers in a single
industry; provided that, for purposes of this restriction, states
municipalities and their political subdivisions are not considered to be
part of any industry.
For purposes of fundamental investment restriction (9) above, the
exception for states, municipalities and their political subdivisions applies
only to tax exempt securities issued by such entities.
An additional investment restriction adopted by the Fund, which may be
changed by the Board of Directors without stockholder approval, provides that
the Fund may not mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by the Fund except as
may be necessary in connection with borrowings mentioned in investment
restriction (4) above or except as may be necessary in connection with
transactions in financial futures contracts and options thereon.
If a percentage restriction on investment policies or the investment or
use of assets set forth above is adhered to at the time a transaction is
effected, later changes in percentage resulting from changing values will not
be considered a violation.
The Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that it may invest in securities of a single issuer.
As a non-diversified fund, the Fund's investments are limited, however, in
order to allow the Fund to continue to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code"). See
"Taxes." To qualify, the Fund complies with certain requirements, including
limiting its investments so that at the close of each quarter of the taxable
year (i) not more than 25% of the market value of the Fund's total assets will
be invested in the securities of a single issuer and (ii) with respect to 50%
of the market value of its total assets, not more than 5% of the market value
of its total assets will be invested in the securities of a single issuer and
the Fund will not own more than 10% of the outstanding voting securities of a
single issuer. For purposes of this restriction, the Fund will regard each
state and each political subdivision, agency or instrumentality of such state
and each multi-state agency of which such state is a member and each public
authority which issues securities on behalf of a private entity as a separate
issuer, except that if the security is backed only by the assets and revenues
of a non-government entity then the entity with the ultimate responsibility
for the payment of interest and principal may be regarded as the sole issuer.
These tax-related limitations may be changed by the Board of Directors of the
Fund to the extent necessary to comply with changes in the Federal tax
requirements. A fund that elects to be classified as "diversified" under the
1940 Act must satisfy the foregoing 5% and 10% requirements with respect to
75% of its total assets.
The Investment Adviser of the Fund and Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") are owned and controlled by Merrill Lynch
& Co., Inc. ("ML & Co."). Because of the affiliation of Merrill Lynch with the
Investment Adviser, the Fund is prohibited from engaging in certain
transactions involving Merrill Lynch except pursuant to an exemptive order or
otherwise in compliance with the provisions of the 1940 Act and the rules and
regulations thereunder. Included among such restricted transactions will be
purchases from or sales to Merrill Lynch of securities in transactions in
which it acts as principal. See "Portfolio Transactions."
4
DESCRIPTION OF AMPS
Certain of the capitalized terms used herein not otherwise defined in
this statement of additional information have the meaning provided in the
Glossary at the back of the prospectus.
The Series C AMPS will be shares of preferred stock that entitle their
holders to receive dividends when, as and if declared by the Board of
Directors, out of funds legally available therefor, at a rate per annum that
may vary for the successive Dividend Periods. After the Initial Dividend
Period, each Subsequent Dividend Period for the Series C AMPS generally will
be a 7-Day Dividend Period; provided however, that prior to any Auction, the
Fund may elect, subject to certain limitations described herein, upon giving
notice to holders thereof, a Special Dividend Period. The Applicable Rate for
a particular Dividend Period will be determined by an Auction conducted on the
Business Day before the start of such Dividend Period. Beneficial Owners and
Potential Beneficial Owners of shares of AMPS may participate in Auctions
therefor, although, except in the case of a Special Dividend Period of more
than 28 days, Beneficial Owners desiring to continue to hold all of their
shares of AMPS regardless of the Applicable Rate resulting from Auctions need
not participate. For an explanation of Auctions and the method of determining
the Applicable Rate, see Appendix D "Auction Procedures."
Except as otherwise required by law or unless there is no Securities
Depository, all outstanding shares of the Series C AMPS will be represented by
one or more certificates registered in the name of the nominee of the
Securities Depository (initially expected to be Cede), and no person acquiring
shares of AMPS will be entitled to receive a certificate representing such
shares. See Appendix D "Auction Procedures." As a result, the nominee of the
Securities Depository is expected to be the sole holder of record of the
shares of AMPS. Accordingly, each purchaser of AMPS must rely on (i) the
procedures of the Securities Depository and, if such purchaser is not a member
of the Securities Depository, such purchaser's Agent Member, to receive
dividends, distributions and notices and to exercise voting rights (if and
when applicable) and (ii) the records of the Securities Depository and, if
such purchaser is not a member of the Securities Depository, such purchaser's
Agent Member, to evidence its beneficial ownership of shares of AMPS.
When issued and sold, the shares of AMPS will have a liquidation
preference of $25,000 per share plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) and will be fully paid and
non-assessable. See "Description of AMPS -- Liquidation Rights" in the
prospectus. The shares of AMPS will not be convertible into shares of common
stock or other capital stock of the Fund, and the holders thereof will have no
preemptive rights. The AMPS will not be subject to any sinking fund but will
be subject to redemption at the option of the Fund at the Optional Redemption
Price on any Dividend Payment Date (except during the Initial Dividend Period
and during a Non-Call Period) and, under certain circumstances, will be
subject to mandatory redemption by the Fund at the Mandatory Redemption Price
stated in the prospectus. See "Description of AMPS -- Redemption" in the
prospectus.
The Fund also has outstanding two series of shares of Other AMPS with
terms that are substantially the same as the terms of the shares of AMPS
described herein and in the prospectus. Cede, the nominee of the Securities
Depository, 55 Water Street, New York, New York 10041-0099, is the sole holder
of record of the shares of Other AMPS. The Series C AMPS offered hereby rank
on a parity with the Other AMPS with respect to dividends and liquidation
preference.
In addition to serving as the Auction Agent in connection with the
Auction Procedures described in the prospectus, The Bank of New York also
serves as the transfer agent, registrar, dividend disbursing agent and
redemption agent for the shares of AMPS. The Auction Agent, however, will
serve merely as the agent of the Fund, acting in accordance with the Fund's
instructions, and will not be responsible for any evaluation or verification
of any matters certified to it.
Except in an Auction, the Fund will have the right (to the extent
permitted by applicable law) to purchase or otherwise acquire any shares of
AMPS so long as the Fund is current in the payment of dividends on AMPS and on
any other capital stock of the Fund ranking on a parity with the AMPS,
including the Other AMPS, with respect to the payment of dividends or upon
liquidation.
5
The following supplements the description of the terms of the shares of
AMPS set forth in the prospectus. This description does not purport to be
complete and is subject to and qualified in its entirety by reference to the
Fund's Charter and Articles Supplementary, including the provisions thereof
establishing the AMPS. The Fund's Charter and the form of Articles
Supplementary establishing the terms of the AMPS have been filed as exhibits
to the Registration Statement of which this statement of additional
information is a part.
Dividends
General. The holders of shares of the Series C AMPS will be entitled to
receive, when, as and if declared by the Board of Directors of the Fund, out
of funds legally available therefor, cumulative cash dividends on their
shares, at the Applicable Rate. Dividends on the shares of AMPS so declared
and payable shall be paid (i) in preference to and in priority over any
dividends so declared and payable on the common stock, and (ii) to the extent
permitted under the Code and to the extent available, out of net tax exempt
income earned on the Fund's investments. Generally, dividends on shares of
AMPS, to the extent that they are derived from interest paid on New Jersey
Municipal Bonds, will be exempt from Federal income taxes, subject to possible
application of the alternative minimum tax and New Jersey personal income tax,
and to the extent they are derived from interest paid on Municipal Bonds, will
be exempt from Federal income taxes, subject to possible application of the
alternative minimum tax. See "Taxes."
Notification of Dividend Period. In determining whether the Fund should
issue a Notice of Special Dividend for the AMPS, the Broker-Dealers will
consider (i) existing short term and long term market rates and indices of
such short term and long term rates, (ii) existing market supply and demand
for short term and long term securities, (iii) existing yield curves for short
term and long term securities comparable to the AMPS, (iv) industry and
financial conditions that may affect the AMPS, (v) the investment objective of
the Fund, and (vi) the Dividend Periods and dividend rates at which current
and potential beneficial holders of the AMPS would remain or become beneficial
holders. If the Broker-Dealers shall not give the Fund a Response by such
second Business Day or if the Response states that given the factors set forth
above it is not advisable that the Fund give a Notice of Special Dividend
Period for the AMPS, the Fund may not give a Notice of Special Dividend Period
in respect of such Request for Special Dividend Period. In the event the
Response indicates that it is advisable that the Fund give a Notice of Special
Dividend Period for the AMPS, the Fund, by no later than the second Business
Day prior to such Auction Date, may give a notice (a "Notice of Special
Dividend Period") to the Auction Agent, the Securities Depository and each
Broker-Dealer, which notice will specify (i) the duration of the Special
Dividend Period, (ii) the Optional Redemption Price as specified in the
related Response and (iii) the Specific Redemption Provisions, if any, as
specified in the related Response. The Fund also shall provide a copy of such
Notice of Special Dividend Period to Moody's and S&P. The Fund shall not give
a Notice of Special Dividend Period, and, if such Notice of Special Dividend
Period shall have been given already, shall give telephonic and written notice
of its revocation (a "Notice of Revocation") to the Auction Agent, each
Broker-Dealer, and the Securities Depository on or prior to the Business Day
prior to the relevant Auction Date if (x) either the 1940 Act AMPS Asset
Coverage is not satisfied or the Fund shall fail to maintain S&P Eligible
Assets and Moody's Eligible Assets each with an aggregate Discounted Value at
least equal to the AMPS Basic Maintenance Amount, in each case on the
Valuation Date immediately preceding the Business Day prior to the relevant
Auction Date on an actual basis and on a pro forma basis giving effect to the
proposed Special Dividend Period (using as a pro forma dividend rate with
respect to such Special Dividend Period the dividend rate which the
Broker-Dealers shall advise the Fund is an approximately equal rate for
securities similar to the AMPS with an equal dividend period), (y) sufficient
funds for the payment of dividends payable on the immediately succeeding
Dividend Payment Date have not been segregated in an account at the Fund's
custodian bank or on the books of the Fund by the close of business on the
third Business Day preceding the related Auction Date or (z) the
Broker-Dealers jointly advise the Fund that, after consideration of the
factors listed above, they have concluded that it is advisable to give a
Notice of Revocation. The Fund also shall provide a copy of such Notice of
Revocation to Moody's and S&P. If the Fund is prohibited from giving a Notice
of Special Dividend Period as a result of the factors enumerated in clause
(x), (y) or (z) above or if the Fund gives a Notice of Revocation with respect
to a Notice of Special Dividend Period for the AMPS, the next succeeding
Dividend Period will be a 7-Day Dividend Period. In addition, in the event
Sufficient Clearing Bids are not made in any Auction or an Auction is not held
for any reason, the next succeeding Dividend Period will be a 7-Day Dividend
Period , and the Fund may not again give a Notice of Special Dividend Period
(and any such attempted notice shall be null and void) until Sufficient
Clearing Bids have been made in an Auction with respect to a 7-Day Dividend
Period.
6
Non-Payment Period; Late Charge. A Non-Payment Period will commence if
the Fund fails to (i) declare, prior to the close of business on the second
Business Day preceding any Dividend Payment Date, for payment on or (to the
extent permitted as described below) within three Business Days after such
Dividend Payment Date to the persons who held such shares as of 12:00 noon,
Eastern time, on the Business Day preceding such Dividend Payment Date, the
full amount of any dividend on shares of AMPS payable on such Dividend Payment
Date or (ii) deposit, irrevocably in trust, in same-day funds, with the
Auction Agent by 12:00 noon, Eastern time, (A) on such Dividend Payment Date
the full amount of any cash dividend on such shares (if declared) payable on
such Dividend Payment Date or (B) on any redemption date for shares of AMPS
called for redemption, the Mandatory Redemption Price per share of such AMPS
or, in the case of an optional redemption, the Optional Redemption Price per
share. Such Non-Payment Period will consist of the period commencing on and
including the aforementioned Dividend Payment Date or redemption date, as the
case may be, and ending on and including the Business Day on which, by 12:00
noon, Eastern time, all unpaid cash dividends and unpaid redemption prices
shall have been so deposited or otherwise shall have been made available to
the applicable holders in same-day funds, provided that a Non-Payment Period
for any AMPS will not end unless the Fund shall have given at least five days'
but no more than 30 days' written notice of such deposit or availability to
the Auction Agent, the Securities Depository and all holders of shares of
AMPS. Notwithstanding the foregoing, the failure by the Fund to deposit funds
as provided for by clause (ii) (A) or (ii) (B) above within three Business
Days after any Dividend Payment Date or redemption date, as the case may be,
in each case to the extent contemplated below, shall not constitute a
"Non-Payment Period."
The Applicable Rate for each Dividend Period for shares of AMPS,
commencing during a Non-Payment Period, will be equal to the Non-Payment
Period Rate; and each Dividend Period commencing after the first day of, and
during, a Non-Payment Period shall be a 7-Day Dividend Period. Any dividend on
shares of AMPS due on any Dividend Payment Date for such shares (if, prior to
the close of business on the second Business Day preceding such Dividend
Payment Date, the Fund has declared such dividend payable on such Dividend
Payment Date to the persons who held such shares as of 12:00 noon, Eastern
time, on the Business Day preceding such Dividend Payment Date) or redemption
price with respect to such shares not paid to such persons when due may be
paid to such persons in the same form of funds by 12:00 noon, Eastern time, on
any of the first three Business Days after such Dividend Payment Date or due
date, as the case may be, provided that such amount is accompanied by a late
charge calculated for such period of non-payment at the Non-Payment Period
Rate applied to the amount of such non-payment based on the actual number of
days comprising such period divided by 365. In the case of a willful failure
of the Fund to pay a dividend on a Dividend Payment Date or to redeem any
shares of AMPS on the date set for such redemption, the preceding sentence
shall not apply and the Applicable Rate for the Dividend Period commencing
during the Non-Payment Period resulting from such failure shall be the
Non-Payment Period Rate. For the purposes of the foregoing, payment to a
person in same-day funds on any Business Day at any time will be considered
equivalent to payment to that person in New York Clearing House (next-day)
funds at the same time on the preceding Business Day, and any payment made
after 12:00 noon, Eastern time, on any Business Day shall be considered to
have been made instead in the same form of funds and to the same person before
12:00 noon, Eastern time, on the next Business Day.
The Non-Payment Period Rate initially will be 200% of the applicable
Reference Rate (or 300% of such rate if the Fund has provided notification to
the Auction Agent prior to the Auction establishing the Applicable Rate for
any dividend that net capital gain or other taxable income will be included in
such dividend on shares of AMPS), provided that the Board of Directors of the
Fund shall have the authority to adjust, modify, alter or change from time to
time by resolution or otherwise the initial Non-Payment Period Rate if the
Board of Directors of the Fund determines and Moody's and S&P (and any
Substitute Rating Agency or Substitute Rating Agencies, as the case may be, in
lieu of Moody's or S&P, or both, in the event either or both of such parties
shall not rate the AMPS) advise the Fund in writing that such adjustment,
modification, alteration or change will not adversely affect their then
current ratings on the AMPS.
Restrictions on Dividends and Other Payments. For so long as any shares
of AMPS are outstanding, the Fund will not declare, pay or set apart for
payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or options, warrants or rights to subscribe
for or purchase, common stock or other stock, if any, ranking junior to shares
of AMPS as to dividends or upon liquidation) in respect of common stock or any
other stock of the Fund ranking junior to or on a parity with shares of AMPS
as to dividends or upon liquidation, or call for redemption, redeem, purchase
or otherwise acquire for consideration any shares of common stock or any other
such junior stock (except by conversion into or exchange for stock of the Fund
ranking junior to AMPS as to
7
dividends and upon liquidation) or any such parity stock (except by conversion
into or exchange for stock of the Fund ranking junior to or on a parity with
AMPS as to dividends and upon liquidation), unless (A) immediately after such
transaction, the Fund would have S&P Eligible Assets and Moody's Eligible
Assets each with an aggregate Discounted Value equal to or greater than the
AMPS Basic Maintenance Amount, and the 1940 Act AMPS Asset Coverage (see
"Asset Maintenance" and "Redemption" below) would be satisfied, (B) full
cumulative dividends on shares of AMPS and shares of the Other AMPS due on or
prior to the date of the transaction have been declared and paid or shall have
been declared and sufficient funds for the payment thereof deposited with the
Auction Agent, (C) any Additional Dividend required to be paid on or before
the date of such declaration or payment has been paid, and (D) the Fund has
redeemed the full number of shares of AMPS required to be redeemed by any
provision for mandatory redemption contained in the Articles Supplementary.
Asset Maintenance
1940 Act AMPS Asset Coverage. The Fund will be required under the
Articles Supplementary to maintain, with respect to shares of AMPS, as of the
last Business Day of each month in which any shares of AMPS are outstanding,
asset coverage of at least 200% with respect to senior securities that are
stock, including the shares of AMPS and Other AMPS (or such other asset
coverage as in the future may be specified in or under the 1940 Act as the
minimum asset coverage for senior securities that are stock of a closed-end
investment company as a condition of paying dividends on its common stock)
("1940 Act AMPS Asset Coverage"). If the Fund fails to maintain 1940 Act AMPS
Asset Coverage and such failure is not cured as of the last Business Day of
the following month (the "1940 Act Cure Date"), the Fund will be required
under certain circumstances to redeem certain of the shares of AMPS. See
"Description of AMPS -- Redemption" in the prospectus and "-- Redemption"
below.
AMPS Basic Maintenance Amount. So long as shares of AMPS are outstanding,
the Fund will be required under the Articles Supplementary as of the last
Business Day of each week (a "Valuation Date") to maintain S&P Eligible Assets
and Moody's Eligible Assets each having in the aggregate a Discounted Value at
least equal to the AMPS Basic Maintenance Amount. If the Fund fails to meet
such requirement as of any Valuation Date and such failure is not cured on or
before the sixth Business Day after such Valuation Date (the "AMPS Basic
Maintenance Cure Date"), the Fund will be required under certain circumstances
to redeem certain of the shares of AMPS. See "Description of AMPS --
Redemption" in the prospectus and "-- Redemption" below. Upon any failure to
maintain the required Discounted Value, the Fund will use its best efforts to
alter the composition of its portfolio to reattain a Discounted Value at least
equal to the AMPS Basic Maintenance Amount on or prior to the AMPS Basic
Maintenance Cure Date.
The AMPS Basic Maintenance Amount as of any Valuation Date, means the
dollar amount equal to (i) the sum of (A) the product of the number of shares
of AMPS and Other AMPS outstanding on such Valuation Date multiplied by the
sum of $25,000 and any applicable redemption premium attributable to the
designation of a Premium Call Period; (B) the aggregate amount of cash
dividends (whether or not earned or declared) that will have accumulated for
each share of AMPS and Other AMPS outstanding to (but not including) the end
of the current Dividend Period for the AMPS that follows such Valuation Date
in the event the then current Dividend Period for the AMPS will end within 49
calendar days of such Valuation Date or through the 49th day after such
Valuation Date in the event the then current Dividend Period will not end
within 49 calendar days of such Valuation Date; (C) in the event the then
current Dividend Period will end within 49 calendar days of such Valuation
Date, the aggregate amount of cash dividends that would accumulate at the
Maximum Applicable Rate applicable to a Dividend Period of 28 or fewer days on
any shares of AMPS and Other AMPS outstanding from the end of such Dividend
Period through the 49th day after such Valuation Date, multiplied by the
larger of the Moody's Volatility Factor and the S&P Volatility Factor,
determined from time to time by Moody's and S&P, respectively (except that if
such Valuation Date occurs during a Non-Payment Period, the cash dividend for
purposes of calculation would accumulate at the then current Non-Payment
Period Rate); (D) the amount of anticipated expenses of the Fund for the 90
days subsequent to such Valuation Date; (E) the amount of current outstanding
balances of any indebtedness that is senior to the AMPS plus interest actually
accrued together with 30 days additional interest on the current outstanding
balances calculated at the current rate; (F) the amount of the Fund's maximum
potential Additional Dividend liability as of such Valuation Date; and (G) any
current liabilities as of such Valuation Date to the extent not reflected in
any of (i)(A) through (i)(F) (including, without limitation, and immediately
upon determination, any amounts due and payable by the Fund's portfolio
securities purchased as of such Valuation Date and any liabilities incurred
for the purpose of clearing securities transactions) less (ii) either (A) the
Discounted Value of any of the
8
Fund's assets, or (B) the face value of any of the Fund's assets if such
assets mature prior to or on the date of redemption of AMPS or payment of a
liability and are either securities issued or guaranteed by the United States
Government or Deposit Securities, in both cases irrevocably deposited by the
Fund for the payment of the amount needed to redeem shares of AMPS subject to
redemption or to satisfy any of (i)(B) through (i)(G).
The Discount Factors and guidelines for determining the market value of
the Fund's portfolio holdings have been based on criteria established in
connection with rating the AMPS. These factors include, but are not limited
to, the sensitivity of the market value of the relevant asset to changes in
interest rates, the liquidity and depth of the market for the relevant asset,
the credit quality of the relevant asset (for example, the lower the rating of
a debt obligation, the higher the related discount factor) and the frequency
with which the relevant asset is marked to market. In no event shall the
Discounted Value of any asset of the Fund exceed its unpaid principal balance
or face amount as of the date of calculation. The Discount Factor relating to
any asset of the Fund and the AMPS Basic Maintenance Amount, the assets
eligible for inclusion in the calculation of the Discounted Value of the
Fund's portfolio and certain definitions and methods of calculation relating
thereto may be changed from time to time by the Fund, without stockholder
approval, but only in the event the Fund receives written confirmation from
S&P, Moody's and any Substitute Rating Agency that any such changes would not
impair the ratings then assigned to the shares of AMPS by S&P or Moody's or
any Substitute Rating Agency.
On or before the seventh Business Day in the case of Moody's and the
third Business Day in the case of S&P after a Valuation Date on which the Fund
fails to maintain S&P Eligible Assets and Moody's Eligible Assets each with an
aggregate Discounted Value equal to or greater than the AMPS Basic Maintenance
Amount, the Fund is required to (i) deliver to Moody's a report with respect
to the calculation of the AMPS Basic Maintenance Amount, the value of its
portfolio holdings and the net asset value and market price of the Fund's
common stock as of the date of such failure (an "AMPS Basic Maintenance
Report") and (ii) send to S&P an electronic notification of such failure. The
Fund also will deliver an AMPS Basic Maintenance Report as of the 21st day of
each month (or if such day is not a Business Day, as of the next succeeding
Business Day) or as of the last Business Day of the month in which the Fund's
fiscal year ends on or before the seventh Business Day after such day. Within
ten Business Days after delivery of such report relating to the month in which
the Fund's fiscal year ends, the Fund will deliver a letter prepared by the
Fund's independent accountants regarding the accuracy of the calculations made
by the Fund in such AMPS Basic Maintenance Report. If any such letter prepared
by the Fund's independent accountants shows that an error was made in the AMPS
Basic Maintenance Report, the calculation or determination made by the Fund's
independent accountants will be conclusive and binding on the Fund. The Fund
will also (i) provide Moody's with an AMPS Basic Maintenance Report and (ii)
send S&P an electronic notification, as of each Valuation Date on or before
the seventh Business Day in the case of Moody's and the third Business Day in
the case of S&P after such date when the Discounted Value of Moody's Eligible
Assets or S&P Eligible Assets, as the case may be, fails to exceed the AMPS
Basic Maintenance Amount by 10% or more in the case of S&P and 25% or more in
the case of Moody's. Also, on or before 5:00 p.m., Eastern time, on the first
Business Day after shares of common stock are repurchased by the Fund, the
Fund will complete and deliver to Moody's an AMPS Basic Maintenance Report as
of the close of business on such date that common stock is repurchased.
Redemption
Mandatory Redemption. The number of shares of AMPS to be redeemed will be
equal to the lesser of (a) the minimum number of shares of AMPS the redemption
of which, if deemed to have occurred immediately prior to the opening of
business on the Cure Date, together with all other shares of the preferred
stock subject to redemption or retirement, would result in the Fund having S&P
Eligible Assets and Moody's Eligible Assets each with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount or
satisfaction of the 1940 Act AMPS Asset Coverage, as the case may be, on such
Cure Date (provided that, if there is no such minimum number of shares the
redemption of which would have such result, all shares of AMPS then
outstanding will be redeemed), and (b) the maximum number of shares of AMPS,
together with all other shares of preferred stock subject to redemption or
retirement, that can be redeemed out of funds expected to be legally available
therefor on such redemption date. In determining the number of shares of AMPS
required to be redeemed in accordance with the foregoing, the Fund shall
allocate the number required to be redeemed which would result in the Fund
having S&P Eligible Assets and Moody's Eligible Assets each with an aggregate
Discounted Value equal to or greater than the AMPS Basic Maintenance Amount or
satisfaction of the 1940 Act AMPS Asset Coverage, as the case may be, pro rata
among shares of AMPS, Other AMPS and other preferred stock subject to
redemption pursuant to
9
provisions similar to those set forth below; provided that, shares of AMPS
that may not be redeemed at the option of the Fund due to the designation of a
Non-Call Period applicable to such shares (A) will be subject to mandatory
redemption only to the extent that other shares are not available to satisfy
the number of shares required to be redeemed and (B) will be selected for
redemption in an ascending order of outstanding number of days in the Non-Call
Period (with shares with the lowest number of days to be redeemed first) and
by lot in the event of shares having an equal number of days in such Non-Call
Period. The Fund is required to effect such a mandatory redemption on a
Business Day which is not later than 30 days after such Cure Date, except that
if the Fund does not have funds legally available for the redemption of all of
the required number of shares of AMPS and other preferred stock that are
subject to mandatory redemption or the Fund otherwise is unable to effect such
redemption on a Business Day which is on or prior to 30 days after such Cure
Date, the Fund will redeem those shares of AMPS that it was unable to redeem
on the earliest practicable date on that it is able to effect such redemption
out of funds legally available therefor.
Notice of Redemption. If shares of AMPS are to be redeemed, a notice of
redemption will be mailed to each record holder of such shares of AMPS
(initially Cede as nominee of the Securities Depository) and to the Auction
Agent not less than 17 nor more than 60 days prior to the date fixed for the
redemption thereof. Each notice of redemption will include a statement setting
forth: (i) the redemption date, (ii) the redemption price, (iii) the aggregate
number of shares of AMPS to be redeemed, (iv) the place or places where shares
of AMPS are to be surrendered for payment of the redemption price, (v) a
statement that dividends on the shares to be redeemed will cease to accumulate
on such redemption date (except that holders may be entitled to Additional
Dividends) and (vi) the provision of the Articles Supplementary pursuant to
which such shares are being redeemed. The notice also will be published in the
eastern and national editions of The Wall Street Journal. No defect in the
notice of redemption or in the mailing or publication thereof will affect the
validity of the redemption proceedings, except as required by applicable law.
In the event that less than all of the outstanding shares of AMPS are to
be redeemed, the shares to be redeemed will be selected by lot or such other
method as the Fund shall deem fair and equitable, and the results thereof will
be communicated to the Auction Agent. The Auction Agent will give notice to
the Securities Depository, whose nominee will be the record holder of all
shares of AMPS, and the Securities Depository will determine the number of
shares to be redeemed from the account of the Agent Member of each Existing
Holder. Each Agent Member will determine the number of shares to be redeemed
from the account of each Existing Holder for which it acts as agent. An Agent
Member may select for redemption shares from the accounts of some Existing
Holders without selecting for redemption any shares from the accounts of other
Existing Holders. Notwithstanding the foregoing, if neither the Securities
Depository nor its nominee is the record holder of all of the shares of AMPS,
the particular shares to be redeemed shall be selected by the Fund by lot or
by such other method as the Fund shall deem fair and equitable.
If the Fund gives notice of redemption, and concurrently or thereafter
deposits in trust with the Auction Agent, or segregates in an account at the
Fund's custodian bank for the benefit of the holders of AMPS to be redeemed
and for payment to the Auction Agent, Deposit Securities (with a right of
substitution) having an aggregate Discounted Value equal to the redemption
payment for the shares of AMPS as to which notice of redemption has been
given, with irrevocable instructions and authority to pay the redemption price
to the record holders thereof, then upon the date of such deposit or, if no
such deposit is made, upon such date fixed for redemption (unless the Fund
shall default in making payment of the redemption price), all rights of the
holders of such shares called for redemption will cease and terminate, except
the right of such holders to receive the redemption price in respect thereof
and any Additional Dividends, but without interest, and such shares no longer
will be deemed to be outstanding. The Fund will be entitled to receive, from
time to time, the interest, if any, earned on such Deposit Securities
deposited with the Auction Agent, and the holders of any shares so redeemed
will have no claim to any such interest. Any funds so deposited which are
unclaimed at the end of one year from such redemption date will be repaid,
upon demand, to the Fund, after which the holders of the shares of AMPS so
called for redemption may look only to the Fund for payment thereof.
So long as any shares of AMPS are held of record by the nominee of the
Securities Depository (initially Cede), the redemption price for such shares
will be paid on the redemption date to the nominee of the Securities
Depository. The Securities Depository's normal procedures now provide for it
to distribute the amount of the redemption price to Agent Members who, in
turn, are expected to distribute such funds to the persons for whom they
10
are acting as agent. Notwithstanding the provisions for redemption described
above, no shares of AMPS shall be subject to optional redemption (i) unless
all dividends in arrears on the outstanding shares of AMPS, and all capital
stock of the Fund ranking on a parity with the AMPS with respect to the
payment of dividends or upon liquidation, including the Other AMPS, have been
or are being contemporaneously paid or declared and set aside for payment and
(ii) if redemption thereof would result in the Fund's failure to maintain
Moody's Eligible Assets or S&P Eligible Assets with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount.
Voting Rights
In connection with the election of the Fund's directors, holders of
shares of AMPS, Other AMPS and any other preferred stock, voting as a separate
class, shall be entitled at all times to elect two of the Fund's directors,
and the remaining directors will be elected by holders of shares of common
stock and shares of AMPS, Other AMPS and any other preferred stock, voting
together as a single class. In addition, if at any time dividends on
outstanding shares of AMPS shall be unpaid in an amount equal to at least two
full years' dividends thereon or if at any time holders of any shares of
preferred stock, including Other AMPS, are entitled, together with the holders
of AMPS, to elect a majority of the directors of the Fund under the 1940 Act,
then the number of directors constituting the Board of Directors automatically
shall be increased by the smallest number that, when added to the two
directors elected exclusively by the holders of shares of AMPS, Other AMPS and
any other preferred stock as described above, would constitute a majority of
the Board of Directors as so increased by such smallest number, and at a
special meeting of stockholders which will be called and held as soon as
practicable, and at all subsequent meetings at which directors are to be
elected, the holders of shares of AMPS, Other AMPS and any other preferred
stock, voting as a separate class, will be entitled to elect the smallest
number of additional directors that, together with the two directors that such
holders in any event will be entitled to elect, constitutes a majority of the
total number of directors of the Fund as so increased. The terms of office of
the persons who are directors at the time of that election will continue. If
the Fund thereafter shall pay, or declare and set apart for payment in full,
all dividends payable on all outstanding shares of AMPS and any other
preferred stock, including Other AMPS, for all past Dividend Periods, the
additional voting rights of the holders of shares of AMPS and any other
preferred stock, including Other AMPS, as described above shall cease, and the
terms of office of all of the additional directors elected by the holders of
shares of AMPS, Other AMPS and any other preferred stock (but not of the
directors with respect to whose election the holders of common stock were
entitled to vote or the two directors the holders of shares of AMPS, Other
AMPS and any other preferred stock have the right to elect in any event) will
terminate automatically.
The affirmative vote of a majority of the votes entitled to be cast by
holders of outstanding shares of AMPS and any other preferred stock, including
Other AMPS, voting as a separate class, will be required to (i) authorize,
create or issue any class or series of stock ranking prior to the AMPS or any
other series of preferred stock with respect to the payment of dividends or
the distribution of assets on dissolution, liquidation or winding up the
affairs of the Fund, or (ii) amend, alter or repeal the provisions of the
Charter, whether by merger, consolidation or otherwise, so as to adversely
affect any of the contract rights expressly set forth in the Charter of
holders of shares of AMPS or any other preferred stock. To the extent
permitted under the 1940 Act, in the event shares of more than one series of
preferred stock are outstanding, the Fund shall not approve any of the actions
set forth in clause (i) or (ii) which adversely affects the contract rights
expressly set forth in the Charter of a holder of shares of AMPS differently
from those of a holder of shares of any other series of preferred stock
without the affirmative vote of at least a majority of votes entitled to be
cast by holders of the shares of AMPS adversely affected and outstanding at
such time (voting separately as a class). The Board of Directors, however,
without stockholder approval, may amend, alter or repeal any or all of the
various rating agency guidelines described herein in the event the Fund
receives confirmation from the rating agencies that any such amendment,
alteration or repeal would not impair the ratings then assigned to shares of
AMPS. Furthermore, the Board of Directors, without stockholder approval, may
terminate compliance with the Moody's or S&P guidelines as discussed under
"Rating Agency Guidelines" in the prospectus. Unless a higher percentage is
provided for under "Description of Capital Stock -- Certain Provisions of the
Charter and By-laws" in the prospectus, the affirmative vote of the holders of
a majority of the outstanding shares of preferred stock (as defined under
"Investment Restrictions"), including AMPS and Other AMPS, entitled to be
cast, voting as a separate class, will be required to approve any plan of
reorganization (including bankruptcy proceedings) adversely affecting such
shares or any action requiring a vote of security holders under Section 13(a)
of the 1940 Act including, among other things, changes in the Fund's
investment objective or changes in the investment policies and restrictions
described as fundamental policies in the prospectus and under "Investment
Restrictions." So long as any shares of AMPS are outstanding, the affirmative
vote of the holders of a majority of
11
the outstanding shares of preferred stock (as defined under "Investment
Restrictions"), including AMPS and Other AMPS, voting together as a single
class, will be required to approve any voluntary application by the Fund for
relief under Federal bankruptcy law or any similar application under state law
for so long as the Fund is solvent and does not foresee becoming insolvent.
The class vote of holders of shares of AMPS, Other AMPS and any other
preferred stock described above in each case will be in addition to a separate
vote of the requisite percentage of shares of common stock and shares of AMPS,
Other AMPS and any other preferred stock, voting together as a single class,
necessary to authorize the action in question. An increase in the number of
authorized shares of preferred stock pursuant to the Charter or the issuance
of additional shares of any series of preferred stock (including AMPS and
Other AMPS) pursuant to the Charter shall not in and of itself be considered
to adversely affect the contract rights of the holders of the AMPS.
Notwithstanding the foregoing, and except as otherwise required by the
1940 Act, (i) holders of outstanding shares of the AMPS will be entitled as a
series, to the exclusion of the holders of all other securities, including
other preferred stock, common stock and other classes of capital stock of the
Fund, to vote on matters affecting the AMPS that do not materially adversely
affect any of the contract rights of holders of such other securities,
including other preferred stock, common stock and other classes of capital
stock, as expressly set forth in the Charter, and (ii) holders of outstanding
shares of AMPS will not be entitled to vote on matters affecting any other
preferred stock that do not materially adversely affect any of the contract
rights of holders of the AMPS, as expressly set forth in the Charter.
The foregoing voting provisions will not apply to any shares of AMPS if,
at or prior to the time when the act with respect to which such vote otherwise
would be required shall be effected, such shares shall have been (i) redeemed
or (ii) called for redemption and sufficient funds shall have been deposited
in trust to effect such redemption.
THE AUCTION
Auction Agent Agreement
The Auction Agent will act as agent for the Fund in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered or omitted, or for any
error of judgment made, by it in the performance of its duties under the
Auction Agent Agreement, and will not be liable for any error of judgment made
in good faith unless the Auction Agent shall have been negligent in
ascertaining, or failing to ascertain, the pertinent facts. Pursuant to the
Auction Agent Agreement, the Fund is required to indemnify the Auction Agent
for certain losses and liabilities incurred by the Auction Agent without
negligence or bad faith on its part in connection with the performance of its
duties under such agreement.
The Auction Agent may terminate the Auction Agent Agreement upon notice
to the Fund, which termination may be no earlier than 60 days following
delivery of such notice. If the Auction Agent resigns, the Fund will use its
best efforts to enter into an agreement with a successor Auction Agent
containing substantially the same terms and conditions as the Auction Agent
Agreement. The Fund may terminate the Auction Agent Agreement at any time,
provided that prior to such termination the Fund shall have entered into such
an agreement with respect thereto with a successor Auction Agent.
Broker-Dealer Agreements
The Auctions require the participation of one or more broker-dealers. A
Broker-Dealer Agreement may be terminated by the Auction Agent or a
Broker-Dealer on five days' notice to the other party, provided that the
Broker-Dealer Agreement with Merrill Lynch may not be terminated without the
prior written consent of the Fund, which consent may not be unreasonably
withheld.
For the six months ended May 31, 2004 and the fiscal years ended November
30, 2003, 2002 and 2001, Merrill Lynch, an affiliate of the Investment
Adviser, earned $_________, $122,450, $135,193 and $95,898, respectively,
pursuant to its Broker-Dealer Agreement with the Fund.
12
Auction Procedures
The Auction Procedures are set forth in Appendix D. The Settlement
Procedures to be used with respect to Auctions are set forth in Appendix C.
RATING AGENCY GUIDELINES
S&P AAA Rating Guidelines
The Discounted Value of the Fund's S&P Eligible Assets is calculated on
each Valuation Date. See "Description of AMPS -- Asset Maintenance -- AMPS
Basic Maintenance Amount." S&P Eligible Assets include cash, Receivables for
New Jersey Municipal Bonds Sold (as defined below), Rule 2a-7 Money Market
Funds and New Jersey Municipal Bonds eligible for consideration under S&P's
current guidelines. For purposes of calculating the Discounted Value of the
Fund's portfolio under current S&P guidelines, the fair market value of New
Jersey Municipal Bonds eligible for consideration under such guidelines must
be discounted by the applicable S&P Discount Factor set forth in the table
below. The Discounted Value of a New Jersey Municipal Bond eligible for
consideration under S&P guidelines is the fair market value thereof divided by
the S&P Discount Factor. The S&P Discount Factor used to discount a particular
New Jersey Municipal Bond will be determined by reference to the rating by
S&P, Moody's or Fitch on such New Jersey Municipal Bond; provided, however,
for purposes of determining the S&P Discount Factor applicable to New Jersey
Municipal Bonds not rated by S&P, the New Jersey Municipal Bonds will carry an
S&P rating one full rating category lower than the S&P rating category that is
the equivalent of the rating category in which such New Jersey Municipal Bond
is placed by a NRSRO, in accordance with the table set forth below:
S&P's Rating Category(1)
--------------------------------------------------------------------------------------------------
AAA*(2) AA* A* BBB* BB* B* CCC* NR**
----------- ---------- --------- --------- --------- ---------- ---------- ----------
159.75% 162.75% 165.75% 168.75% 190.11% 210.11% 230.11% 235.00%
------------------
* S&P rating.
** Not Rated.
(1) For New Jersey Municipal Bonds of any one issuer rated at least BBB- by
S&P, or if not rated by S&P, rated at least A- by another NRSRO, 2% is
added to the applicable S&P Discount Factor for every 1% by which the
fair market value of such New Jersey Municipal Bonds exceeds 5% of the
aggregate fair market value of the S&P Eligible Assets, but in no event
greater than 10%; or for any percentage over 5% add 10 percentage points
to the applicable S&P Discount Factor.
(2) For zero coupon New Jersey Municipal Bonds, the S&P Discount Factor is
441.80%.
Notwithstanding the foregoing, (i) the S&P Discount Factor for short-term
New Jersey Municipal Bonds will be 115%, so long as such New Jersey Municipal
Bonds are rated A-1+ or SP-1+ by S&P and mature or have a demand feature
exercisable in 30 days or less, or 120% so long as such New Jersey Municipal
Bonds are rated A-1 or SP-1 by S&P and mature or have a demand feature
exercisable in 30 days or less, or 125% if such New Jersey Municipal Bonds are
not rated by S&P but are rated VMIG-1, P-1 or MIG-1 by Moody's or F-1+ by
Fitch; provided, however, such short-term New Jersey Municipal Bonds rated by
Moody's or Fitch but not rated by S&P having a demand feature exercisable in
30 days or less must be backed by a letter of credit, liquidity facility or
guarantee from a bank or other financial institution having a short-term
rating of at least A-1+ from S&P and further provided that such short-term New
Jersey Municipal Bonds rated by Moody's or Fitch but not rated by S&P may
comprise no more than 50% of short-term New Jersey Municipal Bonds that
qualify as S&P Eligible Assets, (ii) the S&P Discount Factor for Rule 2a-7
Money Market Funds will be 110%, (iii) the S&P Discount Factor for Receivables
for New Jersey Municipal Bonds Sold that are due in more than five Business
Days from such Valuation Date will be the S&P Discount Factor applicable to
the New Jersey Municipal Bonds sold, and (iv) no S&P Discount Factor will be
applied to cash or to Receivables for New Jersey Municipal Bonds Sold if such
receivables are due within five Business Days of such Valuation Date.
"Receivables for New Jersey Municipal Bonds Sold," for purposes of calculating
S&P Eligible Assets as of any Valuation Date, means the book value of
receivables for New Jersey Municipal Bonds sold as of or prior to such
Valuation Date. For purposes of the foregoing, Anticipation Notes rated SP-1
or, if not rated by S&P, rated VMIG-1 by Moody's or F-1+ by Fitch, which do
not mature or have a demand feature exercisable in 30 days and which do not
have a long-term rating, shall be considered to be short-term New Jersey
Municipal Bonds.
13
The S&P guidelines require certain minimum issue size and impose other
requirements for purposes of determining S&P Eligible Assets. In order to be
considered S&P Eligible Assets, New Jersey Municipal Bonds must:
(i) except for zero coupon New Jersey Municipal Bonds rated AAA by
S&P that mature in 30 years or less, be interest bearing and pay interest
at least semi-annually;
(ii) be payable with respect to principal and interest in U.S.
dollars;
(iii) not be subject to a covered call or covered put option written
by the Fund;
(iv) except for Inverse Floaters, not be part of a private
placement; and
(v) except for Inverse Floaters and legally defeased bonds that are
secured by securities issued or guaranteed by the United States
Government, be part of an issue of New Jersey Municipal Bonds with an
original issue size of at least $10 million or, if of an issue with an
original issue size below $10 million, is rated at least AA or higher by
S&P.
Notwithstanding the foregoing:
(i) New Jersey Municipal Bonds of any one issue type category (as
described below) will be considered S&P Eligible Assets only to the
extent the fair market value of such New Jersey Municipal Bonds does not
exceed 25% of the aggregate fair market value of S&P Eligible Assets,
except that New Jersey Municipal Bonds falling within the utility issue
type category will be broken down into three sub-categories (as described
below) and such New Jersey Municipal Bonds will be considered S&P
Eligible Assets to the extent the fair market value of such New Jersey
Municipal Bonds in each such sub-category does not exceed 25% of the
aggregate fair market value of S&P Eligible Assets and except that New
Jersey Municipal Bonds falling within the general obligation issue type
category will be considered S&P Eligible Assets to the extent the fair
market value of such New Jersey Municipal Bonds does not exceed 50% of
the aggregate fair market value of S&P Eligible Assets. For purposes of
the issue type category requirement described above, New Jersey Municipal
Bonds will be classified within one of the following categories: health
care issues, housing issues, educational facilities issues, student loan
issues, transportation issues, industrial development bond issues,
utility issues, general obligation issues, lease obligations, escrowed
bonds and other issues not falling within one of the aforementioned
categories. The general obligation issue type category includes any
issuer that is directly or indirectly guaranteed by the State of New
Jersey or its political subdivisions. Utility issuers are included in the
general obligation issue type category if the issuer is directly or
indirectly guaranteed by the State of New Jersey or its political
subdivisions. For purposes of the issue type category requirement
described above, New Jersey Municipal Bonds in the utility issue type
category will be classified within one of the three following
sub-categories: (i) electric, gas and combination issues (if the
combination issue includes an electric issue), (ii) water and sewer
utilities and combination issues (if the combination issue does not
include an electric issue), and (iii) irrigation, resource recovery,
solid waste and other utilities;
(ii) New Jersey Municipal Bonds that are escrow bonds or defeased
bonds may compose up to 100% of the aggregate fair market value of S&P
Eligible Assets if such New Jersey Municipal Bonds initially are assigned
a rating by S&P in accordance with S&P's legal defeasance criteria or
rerated by S&P as economic defeased escrow bonds and assigned an AAA
rating. New Jersey Municipal Bonds may be rated as escrow bonds by
another NRSRO or rerated as an escrow bond and assigned the equivalent of
an S&P AAA rating, provided that such equivalent rated New Jersey
Municipal Bonds are limited to 50% of the aggregate fair market value of
S&P Eligible Assets and are deemed to have an AA S&P rating for purposes
of determining the S&P Discount Factor applicable to such New Jersey
Municipal Bonds. The limitations on New Jersey Municipal Bonds in clause
(i) above and clauses (iii) and (iv) below are not applicable to escrow
bonds, however, economically defeased bonds that are either initially
rated or rerated by S&P or another NRSRO and assigned the same rating
level as the issuer of the New Jersey Municipal Bonds will remain in its
original issue type category set forth in clause (1) above;
14
(iii) New Jersey Municipal Bonds that are not rated by any NRSRO may
comprise no more than 10% of S&P Eligible Assets;
(iv) New Jersey Municipal Bonds rated at least BBB- by S&P, or if
not rated by S&P, rated at least A- by another NRSRO, of any one issuer
or guarantor (excluding bond insurers) will be considered S&P Eligible
Assets only to the extent the fair market value of such New Jersey
Municipal Bonds does not exceed 10% of the aggregate fair market value of
the S&P Eligible Assets, High Yield Municipal Bonds of any issuer may
comprise no more than 5% of S&P Eligible Assets, and New Jersey Municipal
Bonds of any one issuer which are not rated by any NRSRO will be
considered S&P Eligible Assets only to the extent the fair market value
of such New Jersey Municipal Bonds does not exceed 5% of the aggregate
fair market value of the S&P Eligible Assets. In the aggregate, the
maximum issuer exposure is limited to 10% of the S&P Eligible Assets; and
(v) New Jersey Municipal Bonds not rated by S&P but rated by another
NRSRO will be included in S&P Eligible Assets only to the extent the fair
market value of such New Jersey Municipal Bonds does not exceed 50% of
the aggregate fair market value of the S&P Eligible Assets.
The Fund may include Municipal Bonds other than New Jersey Municipal
Bonds as S&P Eligible Assets pursuant to guidelines and restrictions to be
established by S&P, provided that S&P advises the Fund in writing that such
action will not adversely affect its then current rating on the AMPS.
As discussed in the prospectus, the Fund may engage in options or futures
transactions. For so long as any shares of AMPS are rated by S&P, the Fund
will not purchase or sell financial futures contracts, write, purchase or sell
options on financial futures contracts or write put options (except covered
put options) or call options (except covered call options) on portfolio
securities unless it receives written confirmation from S&P that engaging in
such transactions will not impair the ratings then assigned to the shares of
AMPS by S&P, except that the Fund may purchase or sell financial futures
contracts based on the Bond Buyer Municipal Bond Index (the "Municipal Index")
or Treasury Bonds and write, purchase or sell put and call options on such
contracts (collectively "S&P Hedging Transactions"), subject to the following
limitations:
(i) the Fund will not engage in any S&P Hedging Transaction based on
the Municipal Index (other than transactions that terminate a financial
futures contract or option held by the Fund by the Fund's taking an
opposite position thereto ("Closing Transactions")), that would cause the
Fund at the time of such transaction to own or have sold the least of (A)
more than 1,000 outstanding financial futures contracts based on the
Municipal Index, (B) outstanding financial futures contracts based on the
Municipal Index exceeding in number 25% of the quotient of the fair
market value of the Fund's total assets divided by $1,000 or (C)
outstanding financial futures contracts based on the Municipal Index
exceeding in number 10% of the average number of daily traded financial
futures contracts based on the Municipal Index in the 30 days preceding
the time of effecting such transaction as reported by The Wall Street
Journal;
(ii) the Fund will not engage in any S&P Hedging Transaction based
on Treasury Bonds (other than Closing Transactions) that would cause the
Fund at the time of such transaction to own or have sold the lesser of
(A) outstanding financial futures contracts based on Treasury Bonds
exceeding in number 50% of the quotient of the fair market value of the
Fund's total assets divided by $100,000 ($200,000 in the case of the
two-year United States Treasury Note) or (B) outstanding financial
futures contracts based on Treasury Bonds exceeding in number 10% of the
average number of daily traded financial futures contracts based on
Treasury Bonds in the 30 days preceding the time of effecting such
transaction as reported by The Wall Street Journal;
(iii) the Fund will engage in Closing Transactions to close out any
outstanding financial futures contract that the Fund owns or has sold or
any outstanding option thereon owned by the Fund in the event (A) the
Fund does not have S&P Eligible Assets with an aggregate Discounted Value
equal to or greater than the AMPS Basic Maintenance Amount on two
consecutive Valuation Dates and (B) the Fund is required to pay Variation
Margin on the second such Valuation Date;
15
(iv) the Fund will engage in a Closing Transaction to close out any
outstanding financial futures contract or option thereon in the month
prior to the delivery month under the terms of such financial futures
contract or option thereon unless the Fund holds the securities
deliverable under such terms; and
(v) when the Fund writes a financial futures contract or an option
thereon, it will either maintain an amount of cash, cash equivalents or
liquid assets in a segregated account with the Fund's custodian, so that
the amount so segregated plus the amount of Initial Margin and Variation
Margin held in the account of or on behalf of the Fund's broker with
respect to such financial futures contract or option equals the fair
market value of the financial futures contract or option, or, in the
event the Fund writes a financial futures contract or option thereon that
requires delivery of an underlying security, it shall hold such
underlying security in its portfolio.
For purposes of determining whether the Fund has S&P Eligible Assets with
a Discounted Value that equals or exceeds the AMPS Basic Maintenance Amount,
the Discounted Value of cash or securities held for the payment of Initial
Margin or Variation Margin shall be zero and the aggregate Discounted Value of
S&P Eligible Assets shall be reduced by an amount equal to (i) 30% of the
aggregate settlement value, as marked to market, of any outstanding financial
futures contracts based on the Municipal Index that are owned by the Fund plus
(ii) 25% of the aggregate settlement value, as marked to market, of any
outstanding financial futures contracts based on Treasury Bonds which
contracts are owned by the Fund.
Moody's Aaa Rating Guidelines
The Discounted Value of the Fund's Moody's Eligible Assets is calculated
on each Valuation Date. See "Description of AMPS -- Asset Maintenance -- AMPS
Basic Maintenance Amount." Moody's Eligible Assets include cash, Receivables
for New Jersey Municipal Bonds and Municipal Bonds Sold (as defined below),
Rule 2a-7 Money Market Funds and New Jersey Municipal Bonds or Municipal Bonds
eligible for consideration under Moody's guidelines. For purposes of
calculating the Discounted Value of the Fund's portfolio under current Moody's
guidelines, the fair market value of New Jersey Municipal Bonds and Municipal
Bonds eligible for consideration under such guidelines must be discounted by
the applicable Moody's Discount Factor set forth in the table below. The
Discounted Value of a New Jersey Municipal Bond or Municipal Bond eligible for
consideration under Moody's guidelines is the lower of par and the quotient of
the fair market value thereof divided by the Moody's Discount Factor. The
Moody's Discount Factor used to discount a particular New Jersey Municipal
Bond or Municipal Bond will be determined by reference to the rating by
Moody's, S&P or Fitch on such New Jersey Municipal Bond or Municipal Bond, in
accordance with the tables set forth below:
Moody's Rating Category(1)
-------------------------------------------------------------------------------------------------------------
Aaa Aa A Baa Other (2)
------------------ ------------------ ------------------ ------------------ ------------------
151% 159% 160% 173% 225%
------------------
(1) Ratings assigned by S&P or Fitch are generally accepted by Moody's at
face value. However, adjustments to face value may be made to particular
categories of credits for which the S&P and/or Fitch rating does not seem
to approximate a Moody's rating equivalent. Split rated securities
assigned by S&P and Fitch will be accepted at the lower of the two
ratings.
(2) New Jersey Municipal Bonds and Municipal Bonds rated Ba1 to B3 by Moody's
or, if not rated by Moody's, rated BB+ to B- by S&P or Fitch. In
addition, New Jersey Municipal Bonds and Municipal Bonds not explicitly
rated by Moody's, S&P or Fitch, but rated at least the equivalent of B3
internally by the Investment Adviser, provided that Moody's reviews and
achieves sufficient comfort with the Investment Adviser's internal credit
rating processes, will be included under "Other" in the table. Unless
conclusions regarding liquidity risk as well as estimates of both the
probability and severity of default for the Fund's assets can be derived
from other sources as well as combined with a number of sources as
presented by the Fund to Moody's, unrated New Jersey Municipal Bonds and
Municipal Bonds which are rated at least the equivalent of B3 by the
Investment Adviser internally are limited to 10% of Moody's Eligible
Assets.
16
Moody's Rating Category
------------------------------------------------------------------------------
MIG-1, VMIG-1, P-1(1) MIG-1, VMIG-1, P-1(2)
------------------------------------ ------------------------------------
100% 136%
------------------
(1) Moody's rated New Jersey Municipal Bonds or Municipal Bonds that have a
maturity less than or equal to 49 days and New Jersey Municipal Bonds or
Municipal Bonds not rated by Moody's but rated the equivalent to MIG-1,
VMIG-1, or P-1 by S&P or Fitch that have a maturity less than or equal to
49 days.
(2) Moody's rated New Jersey Municipal Bonds or Municipal Bonds that have a
maturity greater than 49 days and New Jersey Municipal Bonds or Municipal
Bonds not rated by Moody's but rated the equivalent to MIG-1, VMIG-1, or
P-1 by S&P or Fitch that have a maturity greater than 49 days.
Notwithstanding the foregoing, no Moody's Discount Factor will be applied
to cash or to Receivables for New Jersey Municipal Bonds and Municipal Bonds
Sold that are due within five Business Days of such Valuation Date. The
Moody's Discount Factor for Receivables for New Jersey Municipal Bonds and
Municipal Bonds Sold that are due within six and 30 Business Days of such
Valuation Date will be the Moody's Discount Factor applicable to the New
Jersey Municipal Bonds and Municipal Bonds sold. "Receivables for New Jersey
Municipal Bonds and Municipal Bonds Sold," for purposes of calculating Moody's
Eligible Assets as of any Valuation Date, means the book value of receivables
for New Jersey Municipal Bonds and Municipal Bonds sold as of or prior to such
Valuation Date if such receivables are due within 30 Business Days of such
Valuation Date.
The Moody's Discount Factor for Inverse Floaters shall be the product of
(x) the percentage determined by reference to the rating on the security
underlying such Inverse Floaters multiplied by (y) 1.25.
The Moody's Discount Factor for Rule 2a-7 Money Market Funds shall be
110%.
The Moody's guidelines impose certain requirements as to minimum issue
size, issuer diversification and geographical concentration, as well as other
requirements for purposes of determining whether Municipal Bonds constitute
Moody's Eligible Assets, as set forth in the table below:
Minimum Issue Size Maximum Underlying Maximum Issue Type Maximum State
Rating ($ Millions) Obligor (%)(1) (%)(1)(3) Allowed (%)(1)(4)
---------------------- ---------------------- ---------------------- ---------------------- --------------------
Aaa * 100 100 100
Aa 10 20 60 60
A 10 10 40 40
Baa 10 6 20 20
Ba 10 4 12 12
B 10 3 12 12
Other (2) 10 2 12 12
---------------
* Not applicable.
(1) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category.
(2) New Jersey Municipal Bonds and Municipal Bonds not rated by Moody's, S&P
or Fitch, but rated at least the equivalent of B3 internally by the
Investment Adviser.
(3) Does not apply to general obligation bonds.
(4) Does not apply to New Jersey Municipal Bonds. Territorial bonds (other
than those issued by Puerto Rico and counted collectively) are each
limited to 10% of Moody's Eligible Assets. For diversification purposes,
Puerto Rico will be treated as a state.
For purposes of the maximum underlying obligor requirement described
above, any New Jersey Municipal Bond or Municipal Bond backed by the guaranty,
letter of credit or insurance issued by a third party will be deemed to be
issued by such third party if the issuance of such third party credit is the
sole determinant of the rating on such Bond. For purposes of the issue type
concentration requirement described above, New Jersey Municipal Bonds and
Municipal Bonds will be classified within one of the following categories:
health care issues (teaching and non-teaching hospitals, public and private),
housing issues (single- and multi-family), educational facilities issues
(public and private schools), student loan issues, resource recovery issues,
transportation issues (mass transit, airport and highway bonds), industrial
revenue/pollution control bond issues, utility issues (including water, sewer
and
17
electricity), general obligation issues, lease obligations/certificates of
participation, escrowed bonds and other issues ("Other Issues") not falling
within one of the aforementioned categories (includes special obligations to
crossover, excise and sales tax revenue, recreation revenue, special
assessment and telephone revenue bonds). In no event shall (a) more than 10%
of Moody's Eligible Assets consist of student loan issues, (b) more than 10%
of Moody's Eligible Assets consist of resource recovery issues or (c) more
than 10% of Moody's Eligible Assets consist of Other Issues.
Current Moody's guidelines also require that New Jersey Municipal Bonds
and Municipal Bonds constituting Moody's Eligible Assets pay interest in cash,
are publicly rated B3 or higher by Moody's or, if not rated by Moody's, but
rated by S&P or Fitch, are publicly rated at least B- by S&P or Fitch, or if
not explicitly rated by Moody's, S&P or Fitch, be rated at least the
equivalent of B3 internally by the Investment Adviser, provided that Moody's
reviews and achieves sufficient comfort with the Investment Adviser's internal
credit rating processes, not have suspended ratings by Moody's, if an Inverse
Floater be explicitly rated by Moody's, and be part of an issue of New Jersey
Municipal Bonds and Municipal Bonds of at least $10,000,000 (except for issues
rated Aaa by Moody's, as provided in the chart above).
When the Fund sells New Jersey Municipal Bonds or Municipal Bond and
agrees to repurchase it at a future date, the Discounted Value of such Bond
will constitute a Moody's Eligible Asset and the amount the Fund is required
to pay upon repurchase of such Bond will count as a liability for purposes of
calculating the AMPS Basic Maintenance Amount. For so long as the AMPS are
rated by Moody's, the Fund will not enter into any such reverse repurchase
agreements unless it has received written confirmation from Moody's that such
transactions would not impair the ratings then assigned the AMPS by Moody's.
When the Fund purchases a New Jersey Municipal Bond or Municipal Bond and
agrees to sell it at a future date to another party, cash receivable by the
Fund thereby will constitute a Moody's Eligible Asset if the long-term debt of
such other party is rated at least A2 by Moody's and such agreement has a term
of 30 days or less; otherwise the Discounted Value of such Bond will
constitute a Moody's Eligible Asset.
High Yield Municipal Bonds may comprise no more than 20% of Moody's
Eligible Assets. Unless conclusions regarding liquidity risk as well as
estimates of both the probability and severity of default for the Fund's
assets can be derived from other sources as well as combined with a number of
sources as presented by the Fund to Moody's, unrated High Yield Municipal
Bonds which are rated at least the equivalent of B3 by the Investment Adviser
internally are limited to 10% of Moody's Eligible Assets.
Inverse Floaters, including primary market and secondary market residual
interest bonds, may constitute no more than 10% of Moody's Eligible Assets.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset if it is (i) held in a margin account, (ii) subject to any
material lien, mortgage, pledge, security interest or security agreement of
any kind, (iii) held for the purchase of a security pursuant to a Forward
Commitment or (iv) irrevocably deposited by the Fund for the payment of
dividends or redemption.
For so long as shares of AMPS are rated by Moody's, in managing the
Fund's portfolio, the Investment Adviser will not alter the composition of the
Fund's portfolio if, in the reasonable belief of the Investment Adviser, the
effect of any such alteration would be to cause the Fund to have Moody's
Eligible Assets with an aggregate Discounted Value, as of the immediately
preceding Valuation Date, less than the AMPS Basic Maintenance Amount as of
such Valuation Date; provided, however, that in the event that, as of the
immediately preceding Valuation Date, the aggregate Discounted Value of
Moody's Eligible Assets exceeded the AMPS Basic Maintenance Amount by 5% or
less, the Investment Adviser will not alter the composition of the Fund's
portfolio in a manner reasonably expected to reduce the aggregate Discounted
Value of Moody's Eligible Assets unless the Fund shall have confirmed that,
after giving effect to such alteration, the aggregate Discounted Value of
Moody's Eligible Assets would exceed the AMPS Basic Maintenance Amount.
For so long as any shares of AMPS are rated by Moody's, the Fund will not
engage in Bond Market Association Municipal Swap Index swap transactions ("BMA
swap transactions"), buy or sell financial futures contracts, write, purchase
or sell call options on financial futures contracts or purchase put options on
financial futures contracts or write call options (except covered call
options) on portfolio securities unless it receives written
18
confirmation from Moody's that engaging in such transactions would not impair
the ratings then assigned to the shares of AMPS by Moody's, except that the
Fund may engage in BMA swap transactions, purchase or sell exchange-traded
financial futures contracts based on any index approved by Moody's or Treasury
Bonds, and purchase, write or sell exchange-traded put options on such
financial futures contracts, and purchase, write or sell exchange-traded call
options on such financial futures contracts (collectively, "Moody's Hedging
Transactions"), subject to the following limitations:
(i) the Fund will not engage in any Moody's Hedging Transaction
based on the Municipal Index (other than Closing Transactions) that would
cause the Fund at the time of such transaction to own or have sold (A)
outstanding financial futures contracts based on the Municipal Index
exceeding in number 10% of the average number of daily traded financial
futures contracts based on the Municipal Index in the 30 days preceding
the time of effecting such transaction as reported by The Wall Street
Journal or (B) outstanding financial futures contracts based on the
Municipal Index having fair market value exceeding 50% of the fair market
value of all Municipal Bonds constituting Moody's Eligible Assets owned
by the Fund (other than Moody's Eligible Assets already subject to a
Moody's Hedging Transaction);
(ii) the Fund will not engage in any Moody's Hedging Transaction
based on Treasury Bonds (other than Closing Transactions) that would
cause the Fund at the time of such transaction to own or have sold (A)
outstanding financial futures contracts based on Treasury Bonds having an
aggregate fair market value exceeding 40% of the aggregate fair market
value of Moody's Eligible Assets owned by the Fund and rated Aa by
Moody's (or, if not rated by Moody's but rated by S&P, rated AAA by S&P)
or (B) outstanding financial futures contracts based on Treasury Bonds
having an aggregate fair market value exceeding 80% of the aggregate fair
market value of all Municipal Bonds constituting Moody's Eligible Assets
owned by the Fund (other than Moody's Eligible Assets already subject to
a Moody's Hedging Transaction) and rated Baa or A by Moody's (or, if not
rated by Moody's but rated by S&P, rated A or AA by S&P) (for purposes of
the foregoing clauses (i) and (ii), the Fund shall be deemed to own the
number of financial futures contracts that underlie any outstanding
options written by the Fund);
(iii) the Fund will engage in Closing Transactions to close out any
outstanding financial futures contract based on the Municipal Index if
the amount of open interest in the Municipal Index as reported by The
Wall Street Journal is less than 5,000;
(iv) the Fund will engage in a Closing Transaction to close out any
outstanding financial futures contract by no later than the fifth
Business Day of the month in which such contract expires and will engage
in a Closing Transaction to close out any outstanding option on a
financial futures contract by no later than the first Business Day of the
month in which such option expires;
(v) the Fund will engage in Moody's Hedging Transactions only with
respect to financial futures contracts or options thereon having the next
settlement date or the settlement date immediately thereafter;
(vi) the Fund (A) will not engage in options and futures
transactions for leveraging or speculative purposes, except that the Fund
may engage in an option or futures transaction so long as the combination
of the Fund's non-derivative positions, together with the relevant option
or futures transaction, produces a synthetic investment position, or the
same economic result, that could be achieved by an investment, consistent
with the Fund's investment objective and policies, in a security that is
not an option or futures transaction, subject to the Investment Adviser
periodically demonstrating to Moody's that said economic results are
achieved, and (B) will not write any call options or sell any financial
futures contracts for the purpose of hedging the anticipated purchase of
an asset prior to completion of such purchase;
(vii) the Fund will not enter into an option or futures transaction
unless, after giving effect thereto, the Fund would continue to have
Moody's Eligible Assets with an aggregate Discounted Value equal to or
greater than the AMPS Basic Maintenance Amount; and
19
(viii) the Fund will not engage in BMA swap transactions with
respect to more than 20% of the Fund's net assets; provided that the
Fund's use of futures will proportionately decrease as the Fund's use of
BMA swap transactions increases, and vice-versa.
For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the Discounted Value of Moody's Eligible Assets that the
Fund is obligated to deliver or receive pursuant to an outstanding futures
contract or option shall be as follows: (i) assets subject to call options
written by the Fund that are either exchange-traded and "readily reversible"
or that expire within 49 days after the date as of which such valuation is
made shall be valued at the lesser of (A) Discounted Value and (B) the
exercise price of the call option written by the Fund; (ii) assets subject to
call options written by the Fund not meeting the requirements of clause (i) of
this sentence shall have no value; (iii) assets subject to put options written
by the Fund shall be valued at the lesser of (A) the exercise price and (B)
the Discounted Value of the subject security; (iv) futures contracts shall be
valued at the lesser of (A) settlement price and (B) the Discounted Value of
the subject security, provided that, if a contract matures within 49 days
after the date as of which such valuation is made, where the Fund is the
seller the contract may be valued at the settlement price and where the Fund
is the buyer the contract may be valued at the Discounted Value of the subject
securities; and (v) where delivery may be made to the Fund with any security
of a class of securities, the Fund shall assume that it will take delivery of
the security with the lowest Discounted Value.
For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the following amounts shall be subtracted from the
aggregate Discounted Value of the Moody's Eligible Assets held by the Fund:
(i) 10% of the exercise price of a written call option; (ii) the exercise
price of any written put option; (iii) where the Fund is the seller under a
financial futures contract, 10% of the settlement price of the financial
futures contract; (iv) where the Fund is the purchaser under a financial
futures contract, the settlement price of assets purchased under such
financial futures contract; (v) the settlement price of the underlying
financial futures contract if the Fund writes put options on a financial
futures contract; and (vi) 105% of the fair market value of the underlying
financial futures contracts if the Fund writes call options on a financial
futures contract and does not own the underlying contract.
For so long as any shares of AMPS are rated by Moody's, the Fund will not
enter into any contract to purchase securities for a fixed price at a future
date beyond customary settlement time (other than such contracts that
constitute Moody's Hedging Transactions), except that the Fund may enter into
such contracts to purchase newly-issued securities on the date such securities
are issued ("Forward Commitments"), subject to the following limitations:
(i) the Fund will maintain in a segregated account with its
custodian cash, cash equivalents or short term, fixed-income securities
rated P-1, MIG-1 or VMIG-1 by Moody's and maturing prior to the date of
the Forward Commitment with a fair market value that equals or exceeds
the amount of the Fund's obligations under any Forward Commitments to
which it is from time to time a party or long-term, fixed income
securities with a Discounted Value that equals or exceeds the amount of
the Fund's obligations under any Forward Commitment to which it is from
time to time a party, and
(ii) the Fund will not enter into a Forward Commitment unless, after
giving effect thereto, the Fund would continue to have Moody's Eligible
Assets with an aggregate Discounted Value equal to or greater than the
AMPS Basic Maintenance Amount.
For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the AMPS Basic
Maintenance Amount, the Discounted Value of all Forward Commitments to which
the Fund is a party and of all securities deliverable to the Fund pursuant to
such Forward Commitments shall be zero.
------------------
For so long as shares of AMPS are rated by S&P or Moody's, the Fund,
unless it has received written confirmation from S&P and/or Moody's, as the
case may be, that such action would not impair the ratings then assigned to
the AMPS by S&P and/or Moody's, as the case may be, will not (i) borrow money
except for the
20
purpose of clearing transactions in portfolio securities (which borrowings
under any circumstances shall be limited to the lesser of $10 million and an
amount equal to 5% of the fair market value of the Fund's assets at the time
of such borrowings and which borrowings shall be repaid within 60 days and not
be extended or renewed and shall not cause the aggregate Discounted Value of
Moody's Eligible Assets and S&P Eligible Assets to be less than the AMPS Basic
Maintenance Amount), (ii) engage in short sales of securities, (iii) lend any
securities, (iv) issue any class or series of stock ranking prior to or on a
parity with the AMPS with respect to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up of the
Fund, (v) reissue any AMPS previously purchased or redeemed by the Fund, (vi)
merge or consolidate into or with any other corporation or entity, (vii)
change the Fund's pricing service or (viii) engage in reverse repurchase
agreements.
For as long as the AMPS are rated by S&P, the Fund will not, unless it
has received written confirmation from S&P that such action would not impair
the rating then assigned to the shares of AMPS by S&P, engage in interest rate
swaps, caps and floors, except that the Fund may, without obtaining the
written consent described above, engage in swaps, caps and floors if: (i) the
counterparty to the swap transaction has a short-term rating of A-1 or, if the
counterparty does not have a short-term rating, the counterparty's senior
unsecured long-term debt rating is A- or higher, (ii) the original aggregate
notional amount of the interest rate swap transaction or transactions is not
to be greater than the liquidation preference of the AMPS, (iii) the interest
rate swap transaction will be marked-to-market weekly by the swap
counterparty, (iv) if the Fund fails to maintain an aggregate discounted value
at least equal to the AMPS Basic Maintenance Amount on two consecutive
Valuation Dates then the agreement shall terminate immediately, (v) for the
purpose of calculating the Discounted Value of S&P Eligible Assets, 90% of any
positive mark-to-market valuation of the Fund's rights will be S&P Eligible
Assets, 100% of any negative mark-to-market valuation of the Fund's rights
will be included in the calculation of the AMPS Basic Maintenance Amount, and
(vi) the Fund must maintain liquid assets with a value at least equal to the
net amount of the excess, if any, of the Fund's obligations over its
entitlement with respect to each swap. For caps/floors, the Fund must maintain
liquid assets with a value at least equal to the Fund's obligations with
respect to such caps or floors.
DIRECTORS AND OFFICERS
The Directors of the Fund consist of eight individuals, seven of whom are
not "interested persons" of the Fund as defined in the 1940 Act (the
"non-interested Directors"). The Directors are responsible for the overall
supervision of the operations of the Fund and perform the various duties
imposed on the directors of investment companies by the 1940 Act.
Each non-interested Director is a member of the Fund's Audit Committee
(the "Audit Committee"). The principal responsibilities of the Audit Committee
are the appointment, compensation and oversight of the Fund's independent
accountants, including the resolution of disagreements regarding financial
reporting between Fund management and such independent accountants. The Audit
Committee's responsibilities include, without limitation, to (i) review with
the independent accountants the arrangements for and scope of annual and
special audits and any other services provided by the independent accountants
to the Fund; (ii) discuss with the independent accountants certain matters
relating to the Fund's financial statements, including any adjustment to such
financial statements recommended by such independent accountants or any other
results of any audit; (iii) ensure that the independent accountants submit on
a periodic basis a formal written statement with respect to their
independence, discuss with the independent accountants any relationships or
services disclosed in the statement that may impact the objectivity and
independence of the Fund's independent accountants and recommend that the
Board of Directors take appropriate action in response thereto to satisfy
itself of the independent accountants' independence; and (iv) consider the
comments of the independent accountants with respect to the quality and
adequacy of the Fund's accounting and financial reporting policies and
practices and internal controls and Fund management's responses thereto. The
Board of Directors of the Fund has adopted a written charter for the Audit
Committee. The Committee has retained independent legal counsel to assist it
in connection with these duties. The Audit Committee met four times during the
Fund's fiscal year ended November 30, 2003.
Each non-interested Director is also a member of the Fund's Nominating
Committee (the "Nominating Committee"). The principal responsibilities of the
Nominating Committee are to identify individuals qualified to serve as
non-interested Directors of the Fund and to recommend its nominees for
consideration by the full Board. While the Nominating Committee is solely
responsible for the selection and nomination of the Fund's non-interested
Directors, the Nominating Committee may consider nominations for the office of
the Director made by Fund
21
stockholders as it deems appropriate. Fund stockholders who wish to recommend
a nominee should send nominations to the Secretary of the Fund that include
biographical information and set forth the qualifications of the proposed
nominee. The Nominating Committee is newly formed and did not meet during the
Fund's fiscal year ended November 30, 2003.
Biographical Information
Certain biographical and other information relating to the non-interested
Directors of the Fund is set forth below, including their ages, their
principal occupations for at least the last five years, the length of time
served, the total number of portfolios overseen in the complex of funds
advised by the Investment Adviser, Merrill Lynch Investment Managers, L.P.
("MLIM") or their affiliates ("MLIM/FAM-advised funds") and other public
directorships.
Number of
MLIM/FAM-
Term of Advised
Name, Position(s) Office** and Funds and
Address* Held with the Length of Time Principal Occupation(s) Portfolios
and Age Fund Served During Past Five Years Overseen
---------------- ----------------- ---------------------- ------------------------------------- ---------------------
James H. Director Director Director, The China Business 39 registered
Bodurtha (60) since 1995 Group, Inc. since 1996 and investment
Executive Vice President thereof companies
from 1996 to 2003; Chairman of consisting of
the Board, Berkshire Holding 56 portfolios
Corporation since 1980; Partner,
Squire, Sanders & Dempsey
from 1980 to 1993.
Joe Grills (69) Director Director since 2002 Member of the Committee of 39 registered
Investment of Employee Benefit investment
Assets of the Association of companies
Financial Professionals consisting of
("CIEBA") since 1986; Member 56 portfolios
of CIEBA's Executive
Committee since 1988 and its
Chairman from 1991 to 1992;
Assistant Treasurer of
International Business Machines
Corporation ("IBM") and Chief
Investment Officer of IBM
Retirement Funds from 1986
to 1993; Member of the
Investment Advisory Committee
of the State of New York
Common Retirement Fund since
1989; Member of the
Investment Advisory Committee
of the Howard Hughes Medical
Institute from 1997 to 2000;
Director, Duke Management
Company since 1992 and Vice
Chairman thereof since 1998;
Director, LaSalle Street
Fund from 1995 to 2001;
Director, Kimco Realty
Corporation since 1997;
Member of the Investment
Advisory Committee of the
Virginia Retirement System
since 1998 and Vice
Chairman thereof since 2002;
Director, Montpelier Foundation
since 1998 and its Vice Chairman
since 2000; Member of the
Investment Committee of the
Woodberry Forest School since
[TABLE CONTINUED]
Name,
Address* Public
and Age Directorships
---------------- ---------------------
James H. None
Bodurtha (60)
Joe Grills (69) Kimco Realty
Corporation
(continued on next page)
22
Number of
MLIM/FAM-
Term of Advised
Name, Position(s) Office** and Funds and
Address* Held with the Length of Time Principal Occupation(s) Portfolios
and Age Fund Served During Past Five Years Overseen
---------------- ----------------- ---------------------- ------------------------------------- ---------------------
2000; Member of the Investment
Committee of the National Trust
for Historic Preservation since
2000.
Herbert I. Director Director John M. Olin Professor of 39 registered
London (65) since 1992 Humanities, New York investment
University since 1993 and companies
Professor thereof since 1980; consisting of
President, Hudson Institute since 56 portfolios
1997 and Trustee thereof since
1980; Dean, Gallatin Division of
New York University from 1976
to 1993; Distinguished Fellow,
Herman Kahn Chair, Hudson
Institute from 1984 to 1985;
Director, Damon Corp. from
1991 to 1995; Overseer, Center
for Naval Analyses from 1983 to
1993; Limited Partner,
Hypertech LP since 1996.
Andre F. Director Director since 1992 Harvard Business School: 39 registered
Perold (52) George Gund Professor of investment
Finance and Banking since companies
2000; Senior Associate Dean, consisting of
Director of Faculty Recruiting 56 portfolios
since 2001; Finance Area Chair
from 1996 to 2001; Sylvan C.
Coleman Professor of Financial
Management from 1993 to 2000;
Director, Genbel Securities
Limited and Gensec Bank from
1999 to 2003; Director,
Stockback, Inc. from 2000 to
2002; Director, Sanlam Limited
from 2001 to 2003; Trustee,
Commonfund from 1989 to
2001; Director, Sanlam
Investment Management from
1999 to 2001; Director,
Bulldogresearch.com from 2000
to 2001; Director, Quantec
Limited from 1991 to 1999;
Director and Chairman of the
Board of UNX Inc. since 2003.
[TABLE CONTINUED]
Name,
Address* Public
and Age Directorships
---------------- ---------------------
Herbert I. None
London (65)
Andre F. None
Perold (52)
(continued on next page)
23
Number of
MLIM/FAM-
Term of Advised
Name, Position(s) Office** and Funds and
Address* Held with the Length of Time Principal Occupation(s) Portfolios
and Age Fund Served During Past Five Years Overseen
---------------- ----------------- ---------------------- ------------------------------------- ---------------------
Roberta Director Director since 1999 Shareholder, Modrall, Sperling, 39 registered
Cooper Ramo Roehl, Harris & Sisk, P.A. since investment
(61) 1993; President, American Bar companies
Association from 1995 to 1996 consisting of
and Member of the Board of 56 portfolios
Governors thereof from 1994 to
1997; Shareholder, Poole, Kelly
& Ramo, Attorneys at Law, P.C.
from 1977 to 1993; Director,
Coopers, Inc. since 1999;
Director of ECMC Group
(service provider to students,
schools and lenders) since 2001;
Director, United New Mexico
Bank (now Wells Fargo) from
1983 to 1988; Director, First
National Bank of New Mexico
(now Wells Fargo) from 1975 to
1976.
Robert S. Director Director since 2002 Principal of STI Management 39 registered
Salomon, Jr. (investment adviser) since 1994; investment
(67) Chairman and CEO of Salomon companies
Brothers Asset Management consisting of
from 1992 until 1995; Chairman 56 portfolios
of Salomon Brothers equity
mutual funds from 1992 until
1995; regular columnist with
Forbes Magazine from 1992 to
2002; Director of Stock
Research and U.S. Equity
Strategist at Salomon Brothers
from 1975 until 1991; Trustee,
Commonfund from 1980 to
2001.
Stephen B. Director Director since 2002 Chairman of Fernwood 40 registered
Swensrud (70) Associates (investment adviser) investment
since 1996; Principal, Fernwood companies
Associates (financial consisting of
consultants) since 1975; 57 portfolios
Chairman of R.P.P. Corporation
(manufacturing company) since
1978; Director of International
Mobile Communications,
Incorporated
(telecommunications company)
since 1998.
[TABLE CONTINUED]
Name,
Address* Public
and Age Directorships
---------------- ---------------------
Roberta None
Cooper Ramo
(61)
Robert S. None
Salomon, Jr.
(67)
Stephen B. None
Swensrud (70)
---------------
* The address of each non-interested Director is P.O. Box 9095, Princeton,
New Jersey 08543-9095.
** Each Director serves until his or her successor is elected and qualified,
until December 31 of the year in which he or she turns 72, or until his
or her death, resignation, or removal as provided in the Fund's By-laws,
Charter or by statute.
Certain biographical and other information relating to the Director who
is an "interested person" of the Fund as defined in the 1940 Act (the
"interested Director") and the other officers of the Fund is set forth below,
including their ages, their principal occupations for at least the last five
years, the length of time served, the total number of portfolios overseen in
MLIM/FAM-advised funds and public directorships held.
24
Number of
MLIM/FAM-
Term of Advised
Name, Position(s) Office** and Funds and
Address* Held with the Length of Time Principal Occupation(s) Portfolios
and Age Fund Served During Past Five Years Overseen
---------------- ----------------- ---------------------- ------------------------------------- ---------------------
Terry K. President and President and President of the MLIM/FAM- 125 registered
Glenn (63)*** Director Director **** since advised funds since 1999; investment
1999 Chairman (Americas Region) of companies
MLIM from 2000 to 2002; consisting of
Executive Vice President of 160 portfolios
MLIM and the Investment
Adviser (which terms as used
herein include their corporate
predecessors) from 1983 to
2002; President of FAM
Distributors, Inc. ("FAMD" or
the "Distributor") from 1986 to
2002 and Director thereof from
1991 to 2002; Executive Vice
President and Director of
Princeton Services, Inc.
("Princeton Services") from
1993 to 2002; President of
Princeton Administrators, L.P.
from 1988 to 2002; Director of
Financial Data Services, Inc.
from 1985 to 2002.
Donald C. Vice President Vice President since First Vice President of MLIM 124 registered
Burke (44) and Treasurer 1993 and Treasurer and the Investment Adviser investment
since 1999 since 1997 and Treasurer thereof companies
since 1999; Senior Vice consisting of
President and Treasurer of 159 portfolios
Princeton Services since 1999;
Vice President of FAMD since
1999; Vice President of MLIM
and the Investment Adviser from
1990 to 1997; Director of
Taxation of MLIM since 1990.
Kenneth A. Senior Vice Senior Vice Managing Director of MLIM 39 registered
Jacob (53) President President since since 2000; First Vice President investment
2002 of MLIM from 1997 to 2000; companies
Vice President of MLIM from consisting of
1984 to 1997. 51 portfolios
Theodore R. Vice President Vice President since Director (Municipal Tax-Exempt 5 registered
Jaeckel, Jr. and portfolio 1998 Fund Management) of MLIM investment
(42) manager since 1997; Vice President of companies
MLIM since 1991. consisting of
5 portfolios
John M. Senior Vice Senior Vice Managing Director of MLIM 39 registered
Loffredo (40) President President since since 2000; First Vice President investment
2002 of MLIM from 1997 to 2000; companies
Vice President of MLIM from consisting of
1991 to 1997; Portfolio Manager 51 portfolios
of the Investment Adviser and
MLIM since 1997.
[TABLE CONITNUED]
Name,
Address* Public
and Age Directorships
---------------- ---------------------
Terry K. None
Glenn (63)***
Donald C. None
Burke (44)
Kenneth A. None
Jacob (53)
Theodore R. None
Jaeckel, Jr.
(42)
John M. None
Loffredo (40)
(continued on next page)
25
Number of
MLIM/FAM-
Term of Advised
Name, Position(s) Office** and Funds and
Address* Held with the Length of Time Principal Occupation(s) Portfolios
and Age Fund Served During Past Five Years Overseen
---------------- ----------------- ---------------------- ------------------------------------- ---------------------
Phillip S. Secretary Secretary since First Vice President of MLIM 124 registered
Gillespie (40) 2004 since 2001; Director of MLIM investment
from 2000 to 2001; Vice companies
President of MLIM from 1999 to consisting of 159
2000. portfolios
[TABLE CONITNUED]
Name,
Address* Public
and Age Directorships
---------------- ---------------------
Phillip S. None
Gillespie (40)
------------------
* The address of each officer listed is P.O. Box 9011, Princeton, New
Jersey 08543-9011.
** Elected by and serves at the pleasure of the Board of Directors of the
Fund.
*** Mr. Glenn is an "interested person," as defined in the 1940 Act, of the
Fund based on his former positions with the Investment Adviser, MLIM,
FAMD, Princeton Services, and Princeton Administrators, L.P.
**** As a Director, Mr. Glenn serves until his successor is elected and
qualified or until December 31 of the year in which he turns 72, or until
his death, resignation, or removal as provided in the Fund's by-laws,
charter or by statute.
In connection with the election of the Fund's Directors, holders of
shares of AMPS, Other AMPS and other preferred stock, voting as a separate
class, are entitled to elect two of the Fund's Directors, and the remaining
Directors are elected by all holders of capital stock, voting as a single
class. Messrs. London and Perold are the Directors elected by holders of
preferred stock. See "Description of AMPS-Voting Rights."
Share Ownership
Information relating to each Director's share ownership in the Fund and
in all registered funds in the Merrill Lynch family of funds that are overseen
by the respective Director ("Supervised Merrill Lynch Funds") as of December
31, 2003 is set forth in the chart below.
Aggregate Dollar Range of
Aggregate Dollar Range of Securities in Supervised
Name Equity in the Fund Merrill Lynch Funds
--------------------------------------------------------------- ----------------------------- -----------------------------
Interested Director:
Terry K. Glenn.......................................... None Over $100,000
Non-interested Directors:
James H. Bodurtha....................................... None Over $100,000
Joe Grills.............................................. None Over $100,000
Herbert I. London....................................... None Over $100,000
Andre F Perold.......................................... None None
Roberta Cooper Ramo..................................... None 50,001-$100,000
Robert S. Salomon, Jr................................... None None
Stephen B. Swensrud..................................... None None
As of the date of this statement of additional information, none of the
Directors and officers of the Fund owned any outstanding shares of common
stock or Other AMPS of the Fund. As of the date of this statement of
additional information, none of the non-interested Directors of the Fund or
their immediate family members owned beneficially or of record any securities
in ML & Co.
Compensation of Directors
The Fund pays fees to each non-interested Director for service to the
Fund. Each non-interested Director receives an aggregate annual retainer of
$125,000 for his or her services to MLIM/FAM-advised funds, including the
Fund. The portion of the annual retainer allocated to each MLIM/FAM-advised
fund is determined quarterly based on the relative net assets of each fund. In
addition, each non-interested Director receives a fee per in-person Board
meeting attended and per in-person Audit Committee meeting attended. The
annual per meeting fees paid to each non-interested Director aggregate
$100,000 for all MLIM/FAM-advised funds for which that Director serves and are
allocated equally among those funds. Each Co-Chairman of the Audit Committee
receives an additional
26
annual retainer in the amount of $25,000, which is paid quarterly and
allocated to each MLIM/FAM-advised fund for which such Co-Chairman provides
services based on the relative net assets of each such fund.
The following table sets forth the compensation earned by the
non-interested Directors for the Fund's fiscal year ended November 30, 2003
and the aggregate compensation paid to them from all registered
MLIM/FAM-advised funds for the calendar year ended December 31, 2003.
Pension or Aggregate
Retirement Compensation
Benefits From Fund and
Accrued as other
Compensation Part of Fund MLIM/FAM-
Name of Director From Fund Expense Advised Funds**
----------------------------------------- -------------- -------------- ---------------
James H. Bodurtha*.................... $3,200 None $183,219
Joe Grills*........................... $3,200 None $182,219
Herbert I. London..................... $3,000 None $163,219
Andre F Perold........................ $3,000 None $162,219
Roberta Cooper Ramo................... $3,000 None $163,219
Robert S. Salomon, Jr................. $3,000 None $163,219
Stephen B. Swensrud................... $3,000 None $168,219
------------------
* Co-Chairman of the Audit Committee.
** For the number of MLIM/FAM-advised funds from which each Director
received compensation see table above under "--Biographical Information."
Pursuant to its investment advisory agreement with the Fund (the
"Investment Advisory Agreement"), the Investment Adviser pays all compensation
to all officers of the Fund and all Directors of the Fund who are affiliated
with ML & Co. or its subsidiaries.
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS
The Investment Adviser, which is owned and controlled by ML & Co., a
financial services holding company and the parent of Merrill Lynch, provides
the Fund with investment advisory and administrative services. The Investment
Adviser acts as the investment adviser to more than 100 registered investment
companies and offers investment advisory services to individuals and
institutional accounts. As of May 2004, the Investment Adviser and its
affiliates, including MLIM, had a total of approximately $491 billion in
investment company and other portfolio assets under management, including
approximately $253 billion in fixed income assets. This amount includes assets
managed by certain affiliates of the Investment Adviser. The Investment
Adviser is a limited partnership, the partners of which are ML & Co. and
Princeton Services. The principal business address of the Investment Adviser
is 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
The Investment Advisory Agreement provides that, subject to the
supervision of the Fund's Board of Directors, the Investment Adviser is
responsible for the actual management of the Fund's portfolio. The
responsibility for making decisions to buy, sell or hold a particular security
rests with the Investment Adviser, subject to review by the Board of
Directors.
The portfolio manager primarily responsible for the Fund's day-to-day
management is Theodore R. Jaeckel, Jr. Mr. Jaeckel has been a Director of MLIM
since 1997. Mr. Jaeckel has been a portfolio manager with the Investment
Adviser and MLIM since 1991 and has been the Fund's portfolio manager since
1998. The Fund's portfolio manager will consider analyses from various
sources, make the necessary investment decisions, and place orders for
transactions accordingly.
For its services, the Fund pays the Investment Adviser a monthly fee at
the annual rate of 0.50% of the Fund's average weekly net assets ("average
weekly net assets" means the average weekly value of the total assets of the
Fund, including the proceeds from the issuance of preferred stock, minus the
sum of (i) accrued liabilities of the Fund, (ii) any accrued and unpaid
interest on outstanding borrowings and (iii) accumulated dividends on shares
of preferred stock). For purposes of this calculation, average weekly net
assets is determined at the end of each month on the basis of the average net
assets of the Fund for each week during the month. The assets for each weekly
period are determined by averaging the net assets at the last business day of
a week with the net assets at the last
27
business day of the prior week. The liquidation preference of any outstanding
preferred stock (other than accumulated dividends) is not considered a
liability in determining the Fund's average daily net assets.
For the six months ended May 31, 2004 and the fiscal years ended October
31, 2003, 2002 and 2001, the fees paid by the Fund to the Investment Adviser
pursuant to the Investment Advisory Agreement were $________, $1,563,814,
$1,539,945 and $1,542,657, respectively.
For the six months ended May 31, 2004, and the fiscal years ended
November 30, 2003, 2002 and 2001, the Investment Adviser reimbursed the Fund
$___________, $10,656, $47, and $0, respectively.
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Fund connected with
investment and economic research, trading and investment management of the
Fund, as well as the compensation of all Directors of the Fund who are
affiliated persons of the Investment Adviser or any of its affiliates. The
Fund pays all other expenses incurred in the operation of the Fund, including,
among other things, expenses for legal and auditing services, taxes, costs of
preparing, printing and mailing proxies, listing fees, stock certificates and
stockholder reports, charges of the custodian and the transfer agent, dividend
disbursing agent and registrar, Commission fees, fees and expenses of
non-interested Directors, accounting and pricing costs, insurance, interest,
brokerage costs, litigation and other extraordinary or non-recurring expenses,
mailing and other expenses properly payable by the Fund. Certain accounting
services are provided to the Fund by State Street Bank and Trust Company
("State Street") pursuant to an agreement between State Street and the Fund.
The Fund will pay the costs of these services. In addition, the Fund will
reimburse the Investment Adviser for certain additional accounting services.
The table below shows the amounts paid by the Fund to State Street and to
the Investment Adviser for accounting services for the periods indicated:
Paid by the Fund Paid by the Fund to the
Period to State Street Investment Adviser
------ --------------- ------------------
Six months ended May 31, 2004............ $ $
Fiscal year ended 2003................... $107,824 $7,361
Fiscal year ended 2002................... $107,447 $12,632
Fiscal year ended 2001................... $87,338 $11,095
Unless earlier terminated as described below, the Investment Advisory
Agreement will remain in effect from year to year if approved annually (a) by
the Board of Directors of the Fund or by a majority of the outstanding shares
of the Fund and (b) by a majority of the Directors who are not parties to such
contract or interested persons (as defined in the 1940 Act) of any such party.
Such contract is not assignable and may be terminated without penalty on 60
days' written notice at the option of either party thereto or by the vote of
the stockholders of the Fund.
In connection with the Board of Directors' consideration of the
Investment Advisory Agreement, the Board compared the Fund's fee rate for
advisory and administrative services and the Fund's historical performance to
certain comparable funds and reviewed information derived from a number of
sources and covering a range of issues. The Board of Directors considered the
compensation paid to the Investment Adviser and the services provided to the
Fund by the Investment Adviser under the Investment Advisory Agreement, as
well as other services provided by the Investment Adviser and its affiliates
under other agreements, and the personnel who will provide these services. In
addition to the investment advisory services provided to the Fund, the
Investment Adviser and its affiliates provide administrative services,
stockholder services, oversight of fund accounting, marketing services,
assistance in meeting legal and regulatory requirements, and other services
necessary for the operation of the Fund.
28
The Fund's Board of Directors also considered the direct and indirect benefits
to the Investment Adviser from its relationship with the Fund. Based on their
experience as Directors of the Fund and as directors of other MLIM/FAM-advised
funds, the Board of Directors concluded that the services provided are of a
high quality and that the Fund benefits and should continue to benefit from
those services.
In reviewing the Investment Advisory Agreement, the Board focused on the
experience, resources and strengths of the Investment Adviser and its
affiliates in managing investment companies that invest primarily in New
Jersey Municipal Bonds, including other MLIM/FAM-advised leveraged closed end
funds that have investment objectives and strategies substantially similar to
those of the Fund. The Board also considered the Investment Adviser's
experience in managing funds that use leverage through the issuance of
preferred stock. The Board concluded that the Investment Adviser has a high
level of expertise in managing the types of investments used by the Fund and
in managing leverage, and concluded that the Fund benefits from that
expertise. The Directors, based on their experience as directors of other
investment companies managed by the Investment Adviser and its affiliates as
well as of the Fund, also focused on the quality of the Investment Adviser's
compliance and administrative staff. The Board noted that, in addition to the
analysts and compliance personnel dedicated to the tax-exempt fixed income
management group, the Investment Adviser has a separate administrative, legal
and compliance staff to ensure a high level of quality in the compliance and
administrative services provided to the Fund.
In connection with its consideration of the Investment Advisory
Agreement, the Board of Directors also reviewed the compliance and
administrative services provided to the Fund by the Investment Adviser,
including its oversight of the Fund's day to day operations and its oversight
of Fund accounting. The Investment Adviser and its affiliates provide
compliance and administrative services to the Fund and all the
MLIM/FAM-advised funds, as well as to a number of third party fund groups. The
Board of Directors concluded, based on their experience as Directors, that,
historically, the compliance and administrative services provided by the
Investment Adviser and its affiliates were of a high quality and that the Fund
has benefited from these services.
In reviewing the Investment Advisory Agreement, the Board of Directors
placed significant emphasis on the Fund's fee rate for advisory and
administrative services and the Fund's historical performance as compared to
those of comparable leveraged, closed-end funds that are managed by other
investment advisers that invest primarily in single state municipal
obligations as provided by Lipper Inc. In particular, the Board of Directors
noted that the Fund had the lowest contractual advisory fee rate at a common
asset level among five comparable funds. The Board of Directors also found
that the Fund had the second lowest fee rate for advisory and administrative
services as a percentage of total assets at a common asset level and the
second lowest fee rate for advisory and administrative services as a
percentage of assets attributable to common stock at a common asset level
including leverage (below the median of the group in both instances). The
Board also compared the Fund's total expenses, both including and excluding
assets attributable to leverage, and concluded that, in each case, the Fund's
expenses were the second lowest in its category and below the median of the
group. The Board also noted that the Fund's historical performance was
comparable to that of other, similarly managed closed-end leveraged single
state insured municipal debt funds. The Board of Directors concluded that the
advisory fee rate was reasonable in relation to the services provided by the
Investment Adviser to the Fund as well as the costs incurred and benefits to
be gained by the Investment Adviser and its affiliates in providing such
services.
The Board considered whether there should be changes in the advisory fee
rate or structure in order to enable the Fund to participate in any economies
of scale that the Investment Adviser may experience as a result of growth in
the Fund's assets. The Board considered whether there should be changes in the
advisory fee rate or structure in order to enable the Fund to participate in
any economies of scale that the Investment Adviser may experience as a result
of growth in the Fund's assets. The Board determined that the current advisory
fee structure was reasonable and that no changes are currently necessary. The
non-interested Directors were represented by independent counsel who assisted
them in their deliberations.
Code of Ethics
The Fund's Board of Directors approved a Code of Ethics under Rule 17j-1
of the 1940 Act that covers the Fund and the Investment Adviser. The Code of
Ethics establishes procedures for personal investing and restricts
29
certain transactions. Employees subject to the Code of Ethics may invest in
securities for their personal investment accounts, including securities that
may be purchased or held by the Fund.
Proxy Voting Policies and Procedures
The Fund's Board of Directors has delegated to the Investment Adviser
authority to vote all proxies relating to the Fund's portfolio securities. The
Investment Adviser has adopted policies and procedures ("Proxy Voting
Procedures") with respect to the voting of proxies related to the portfolio
securities held in the account of one or more of its clients, including the
Fund. Pursuant to these Proxy Voting Procedures, the Investment Adviser's
primary objective when voting proxies is to make proxy voting decisions solely
in the best interests of the Fund and its stockholders, and to act in a manner
that the Investment Adviser believes is most likely to enhance the economic
value of the securities held by the Fund. The Proxy Voting Procedures are
designed to ensure that the Investment Adviser considers the interests of its
clients, including the Fund, and not the interests of the Investment Adviser,
when voting proxies and that real (or perceived) material conflicts that may
arise between the Investment Adviser's interest and those of the Investment
Adviser's clients are properly addressed and resolved.
In order to implement the Proxy Voting Procedures, the Investment Adviser
has formed a Proxy Voting Committee (the "Committee"). The Committee is
comprised of the Investment Adviser's Chief Investment Officer (the "CIO"),
one or more other senior investment professionals appointed by the CIO,
portfolio managers and investment analysts appointed by the CIO and any other
personnel the CIO deems appropriate. The Committee will also include two
non-voting representatives from the Investment Adviser's Legal department
appointed by the Investment Adviser's General Counsel. The Committee's
membership shall be limited to full-time employees of the Investment Adviser.
No person with any investment banking, trading, retail brokerage or research
responsibilities for the Investment Adviser's affiliates may serve as a member
of the Committee or participate in its decision making (except to the extent
such person is asked by the Committee to present information to the Committee,
on the same basis as other interested knowledgeable parties not affiliated
with the Investment Adviser might be asked to do so). The Committee determines
how to vote the proxies of all clients, including the Fund, that have
delegated proxy voting authority to the Investment Adviser and seeks to ensure
that all votes are consistent with the best interests of those clients and are
free from unwarranted and inappropriate influences. The Committee establishes
general proxy voting policies for the Investment Adviser and is responsible
for determining how those policies are applied to specific proxy votes, in
light of each issuer's unique structure, management, strategic options and, in
certain circumstances, probable economic and other anticipated consequences of
alternate actions. In so doing, the Committee may determine to vote a
particular proxy in a manner contrary to its generally stated policies. In
addition, the Committee will be responsible for ensuring that all reporting
and recordkeeping requirements related to proxy voting are fulfilled.
The Committee may determine that the subject matter of a recurring proxy
issue is not suitable for general voting policies and requires a case-by-case
determination. In such cases, the Committee may elect not to adopt a specific
voting policy applicable to that issue. The Investment Adviser believes that
certain proxy voting issues require investment analysis -- such as approval of
mergers and other significant corporate transactions -- akin to investment
decisions, and are, therefore, not suitable for general guidelines. The
Committee may elect to adopt a common position for the Investment Adviser on
certain proxy votes that are akin to investment decisions, or determine to
permit the portfolio manager to make individual decisions on how best to
maximize economic value for the Fund (similar to normal buy/sell investment
decisions made by such portfolio managers). While it is expected that the
Investment Adviser will generally seek to vote proxies over which the
Investment Adviser exercises voting authority in a uniform manner for all the
Investment Adviser's clients, the Committee, in conjunction with the Fund's
portfolio manager, may determine that the Fund's specific circumstances
require that its proxies be voted differently.
To assist the Investment Adviser in voting proxies, the Committee has
retained Institutional Shareholder Services ("ISS"). ISS is an independent
adviser that specializes in providing a variety of fiduciary-level
proxy-related services to institutional investment managers, plan sponsors,
custodians, consultants, and other institutional investors. The services
provided to the Investment Adviser by ISS include in-depth research, voting
recommendations (although the Investment Adviser is not obligated to follow
such recommendations), vote execution, and recordkeeping. ISS will also assist
the Fund in fulfilling its reporting and recordkeeping obligations under the
1940 Act.
30
The Investment Adviser's Proxy Voting Procedures also address special
circumstances that can arise in connection with proxy voting. For instance,
under the Proxy Voting Procedures, the Investment Adviser generally will not
seek to vote proxies related to portfolio securities that are on loan,
although it may do so under certain circumstances. In addition, the Investment
Adviser will vote proxies related to securities of foreign issuers only on a
best efforts basis and may elect not to vote at all in certain countries where
the Committee determines that the costs associated with voting generally
outweigh the benefits. The Committee may at any time override these general
policies if it determines that such action is in the best interests of the
Fund.
From time to time, the Investment Adviser may be required to vote proxies
in respect of an issuer where an affiliate of the Investment Adviser (each, an
"Affiliate"), or a money management or other client of the Investment Adviser
(each, a "Client") is involved. The Proxy Voting Procedures and the Investment
Adviser's adherence to those procedures are designed to address such conflicts
of interest. The Committee intends to strictly adhere to the Proxy Voting
Procedures in all proxy matters, including matters involving Affiliates and
Clients. If, however, an issue representing a non-routine matter that is
material to an Affiliate or a widely known Client is involved such that the
Committee does not reasonably believe it is able to follow its guidelines (or
if the particular proxy matter is not addressed by the guidelines) and vote
impartially, the Committee may, in its discretion for the purposes of ensuring
that an independent determination is reached, retain an independent fiduciary
to advise the Committee on how to vote or to cast votes on behalf of the
Investment Adviser's clients.
In the event that the Committee determines not to retain an independent
fiduciary, or it does not follow the advice of such an independent fiduciary,
the powers of the Committee shall pass to a subcommittee, appointed by the CIO
(with advice from the Secretary of the Committee), consisting solely of
Committee members selected by the CIO. The CIO shall appoint to the
subcommittee, where appropriate, only persons whose job responsibilities do
not include contact with the Client and whose job evaluations would not be
affected by the Investment Adviser's relationship with the Client (or failure
to retain such relationship). The subcommittee shall determine whether and how
to vote all proxies on behalf of the Investment Adviser's clients or, if the
proxy matter is, in their judgment, akin to an investment decision, to defer
to the applicable portfolio managers, provided that, if the subcommittee
determines to alter the Investment Adviser's normal voting guidelines or, on
matters where the Investment Adviser's policy is case-by-case, does not follow
the voting recommendation of any proxy voting service or other independent
fiduciary that may be retained to provide research or advice to the Investment
Adviser on that matter, no proxies relating to the Client may be voted unless
the Secretary, or in the Secretary's absence, the Assistant Secretary of the
Committee concurs that the subcommittee's determination is consistent with the
Investment Adviser's fiduciary duties.
In addition to the general principles outlined above, the Investment
Adviser has adopted voting guidelines with respect to certain recurring proxy
issues that are not expected to involve unusual circumstances. These policies
are guidelines only, and the Investment Adviser may elect to vote differently
from the recommendation set forth in a voting guideline if the Committee
determines that it is in the Fund's best interest to do so. In addition, the
guidelines may be reviewed at any time upon the request of a Committee member
and may be amended or deleted upon the vote of a majority of Committee members
present at a Committee meeting at which there is a quorum.
The Investment Adviser has adopted specific voting guidelines with
respect to the following proxy issues:
o Proposals related to the composition of the Board of Directors of
issuers other than investment companies. As a general matter, the
Committee believes that a company's Board of Directors (rather than
stockholders) is most likely to have access to important, nonpublic
information regarding a company's business and prospects, and is
therefore best-positioned to set corporate policy and oversee
management. The Committee, therefore, believes that the foundation
of good corporate governance is the election of qualified,
independent corporate directors who are likely to diligently
represent the interests of stockholders and oversee management of
the corporation in a manner that will seek to maximize stockholder
value over time. In individual cases, the Committee may look at a
nominee's history of representing stockholder interests as a
director of other companies or other factors, to the extent the
Committee deems relevant.
31
o Proposals related to the selection of an issuer's independent
auditors. As a general matter, the Committee believes that corporate
auditors have a responsibility to represent the interests of
stockholders and provide an independent view on the propriety of
financial reporting decisions of corporate management. While the
Committee will generally defer to a corporation's choice of auditor,
in individual cases, the Committee may look at an auditors' history
of representing stockholder interests as auditor of other companies,
to the extent the Committee deems relevant.
o Proposals related to management compensation and employee benefits.
As a general matter, the Committee favors disclosure of an issuer's
compensation and benefit policies and opposes excessive
compensation, but believes that compensation matters are normally
best determined by an issuer's board of directors, rather than
stockholders. Proposals to "micro-manage" an issuer's compensation
practices or to set arbitrary restrictions on compensation or
benefits will, therefore, generally not be supported.
o Proposals related to requests, principally from management, for
approval of amendments that would alter an issuer's capital
structure. As a general matter, the Committee will support requests
that enhance the rights of common stockholders and oppose requests
that appear to be unreasonably dilutive.
o Proposals related to requests for approval of amendments to an
issuer's charter or by-laws. As a general matter, the Committee
opposes poison pill provisions.
o Routine proposals related to requests regarding the formalities of
corporate meetings.
o Proposals related to proxy issues associated solely with holdings of
investment company shares. As with other types of companies, the
Committee believes that a fund's Board of Directors (rather than its
stockholders) is best-positioned to set fund policy and oversee
management. However, the Committee opposes granting Boards of
Directors authority over certain matters, such as changes to a
fund's investment objective, that the Investment Company Act
envisions will be approved directly by stockholders.
o Proposals related to limiting corporate conduct in some manner that
relates to the stockholder's environmental or social concerns. The
Committee generally believes that annual stockholder meetings are
inappropriate forums for discussion of larger social issues, and
opposes stockholder resolutions "micro-managing" corporate conduct
or requesting release of information that would not help a
stockholder evaluate an investment in the corporation as an economic
matter. While the Committee is generally supportive of proposals to
require corporate disclosure of matters that seem relevant and
material to the economic interests of stockholders, the Committee is
generally not supportive of proposals to require disclosure of
corporate matters for other purposes.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors, the Investment
Adviser is primarily responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage. The Fund has no obligation to
deal with any dealer or group of dealers in the execution of transactions in
portfolio securities of the Fund. Where possible, the Fund deals directly with
the dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. It is
the policy of the Fund to obtain the best results in conducting portfolio
transactions for the Fund, taking into account such factors as price
(including the applicable dealer spread or commission), the size, type and
difficulty of the transaction involved, the firm's general execution and
operations facilities and the firm's risk in positioning the securities
involved. The cost of portfolio securities transactions of the Fund primarily
consists of dealer or underwriter spreads and brokerage commissions. While
reasonable competitive spreads or commissions are sought, the Fund will not
necessarily be paying the lowest spread or commission available on any
particular transaction.
32
Subject to obtaining the best net results, dealers who provide
supplemental investment research (such as quantitative and modeling
information assessments and statistical data and provide other similar
services) to the Investment Adviser may receive orders for transactions by the
Fund. Information so received will be in addition to and not in lieu of the
services required to be performed by the Investment Adviser under the
Investment Advisory Agreement and the expense of the Investment Adviser will
not necessarily be reduced as a result of the receipt of such supplemental
information. Supplemental investment research obtained from such dealers might
be used by the Investment Adviser in servicing all of its accounts and such
research might not be used by the Investment Adviser in connection with the
Fund.
The Fund invests in securities traded in the over-the-counter markets,
and the Fund intends to deal directly with dealers who make markets in the
securities involved, except in those circumstances where better execution is
available elsewhere. Under the 1940 Act, except as permitted by exemptive
order, persons affiliated with the Fund, including Merrill Lynch, are
prohibited from dealing with the Fund as principal in the purchase and sale of
securities. Since transactions in the over-the-counter market usually involve
transactions with dealers acting as principals for their own accounts, the
Fund does not deal with Merrill Lynch and its affiliates in connection with
such principal transactions except that, pursuant to exemptive orders obtained
by the Investment Adviser, the Fund may engage in principal transactions with
Merrill Lynch in high quality, short term, tax exempt securities. See
"Investment Restrictions." However, affiliated persons of the Fund, including
Merrill Lynch, may serve as its brokers in certain over-the-counter
transactions conducted on an agency basis. In addition, the Fund has received
an exemptive order, under which it may purchase investment grade Municipal
Bonds through group orders from an underwriting syndicate of which Merrill
Lynch is a member subject to conditions set forth in such order (the "Group
Order Exemptive Order"). A group order is an order for securities held in an
underwriting syndicate for the account of all members of the syndicate, and in
proportion to their respective participation in the syndicate.
The Fund also may purchase tax exempt debt instruments in individually
negotiated transactions with the issuers. Because an active trading market may
not exist for such securities, the prices that the Fund may pay for these
securities or receive on their resale may be lower than that for similar
securities with a more liquid market.
Certain court decisions have raised questions as to the extent to which
investment companies should seek exemptions under the 1940 Act in order to
seek to recapture underwriting and dealer spreads from affiliated entities.
The Fund's Board of Directors has considered all factors deemed relevant and
has made a determination not to seek such recapture at this time. The Fund's
Board of Directors will reconsider this matter from time to time.
The Fund has received an exemptive order from the Commission permitting
it to lend portfolio securities to Merrill Lynch or its affiliates. Pursuant
to that order, the Fund also has retained an affiliated entity of the
Investment Adviser as the securities lending agent for a fee, including a fee
based on a share of the returns on investment of cash collateral. That entity
may, on behalf of the Fund, invest cash collateral received by the Fund for
such loans, among other things, in a private investment company managed by
that entity or in registered money market funds advised by the Investment
Adviser or its affiliates.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Because of different
investment objectives or other factors, a particular security may be bought
for an advisory client when other clients are selling the same security. If
purchases or sales of securities by the Investment Adviser for the Fund or
other funds for which it acts as investment adviser or for other advisory
clients arise for consideration at or about the same time, transactions in
such securities will be made, insofar as feasible, for the respective funds
and clients in a manner deemed equitable to all. Transactions effected by the
Investment Adviser (or its affiliates) on behalf of more than one of its
clients during the same period may increase the demand for securities being
purchased or the supply of securities being sold, causing an adverse effect on
price.
Section 11(a) of the Securities Exchange Act of 1934 generally prohibits
members of the U.S. national securities exchanges from executing exchange
transactions for their affiliates and institutional accounts that they manage
unless the member (i) has obtained prior express authorization from the
account to effect such transactions, (ii) at least annually furnishes the
account with a statement setting forth the aggregate compensation received by
the member in effecting such transactions, and (iii) complies with any rules
the Commission has prescribed with respect to the requirements of clauses (i)
and (ii). To the extent Section 11(a) would apply to Merrill Lynch acting as a
33
broker for the Fund in any of its portfolio transactions executed on any such
securities exchange of which it is a member, appropriate consents have been
obtained from the Fund and annual statements as to aggregate compensation will
be provided to the Fund.
Portfolio Turnover
Generally, the Fund does not purchase securities for short term trading
profits. However, the Fund may dispose of securities without regard to the
time they have been held when such actions, for defensive or other reasons,
appear advisable to the Investment Adviser. While it is not possible to
predict turnover rates with any certainty, at present it is anticipated that
the Fund's annual portfolio turnover rate, under normal circumstances, should
be less than 100%. (The portfolio turnover rate is calculated by dividing the
lesser of purchases or sales of portfolio securities for the particular fiscal
year by the monthly average of the value of the portfolio securities owned by
the Fund during the particular fiscal year. For purposes of determining this
rate, all securities whose maturities at the time of acquisition are one year
or less are excluded.) A high portfolio turnover rate results in greater
transaction costs, which are borne directly by the Fund and may have certain
tax consequences for stockholders.
For the six months ended May 31, 2004 and the fiscal years ended November
30, 2003 and 2002, the Fund's portfolio turnover rates were _____%, 28.93% and
41.47%, respectively.
TAXES
The Fund has elected to qualify for the special tax treatment afforded
regulated investment companies ("RICs") under the Internal Revenue Code of
1986, as amended (the "Code"). As long as it so qualifies, in any taxable year
in which it distributes at least 90% of its taxable net income and 90% of its
tax exempt net income (see below), the Fund (but not its stockholders) will
not be subject to Federal income tax to the extent that it distributes its net
investment income and net realized capital gains. The Fund intends to
distribute substantially all of such income. If, in any taxable year, the Fund
fails to qualify as a RIC under the Code, it would be taxed in the same manner
as an ordinary corporation and all distributions from earnings and profits (as
determined under U.S. Federal income tax principles) to its stockholders would
be taxable as ordinary dividend income eligible for the maximum 15% tax rate
for non-corporate shareholders and the dividends-received deduction for
corporate shareholders. However , the Fund's distributions derived from income
on tax exempt obligations, as defined herein, would no longer qualify for
treatment as exempt interest.
The Code requires a RIC to pay a nondeductible 4% excise tax to the
extent the RIC does not distribute, during each calendar year, 98% of its
ordinary income, determined on a calendar year basis, and 98% of its capital
gains, determined, in general, on an October 31 year-end, plus certain
undistributed amounts from previous years. The required distributions,
however, are based only on the taxable income of a RIC. The excise tax,
therefore, generally will not apply to the tax exempt income of a RIC, such as
the Fund, that pays exempt-interest dividends.
The Internal Revenue Service (the "IRS"), in a revenue ruling, held that
certain auction rate preferred stock would be treated as stock for Federal
income tax purposes. The terms of the AMPS are substantially similar, but not
identical, to the auction rate preferred stock discussed in the revenue
ruling, and in the opinion of Sidley Austin Brown & Wood LLP, counsel to the
Fund, the shares of AMPS will constitute stock of the Fund and distributions
with respect to shares of AMPS (other than distributions in redemption of
shares of AMPS subject to Section 302(b) of the Code) will constitute
dividends to the extent of the Fund's current and accumulated earnings and
profits as calculated for Federal income tax purposes. Nevertheless, it is
possible that the IRS might take a contrary position, asserting, for example,
that the shares of AMPS constitute debt of the Fund. If this position were
upheld, the discussion of the treatment of distributions below would not
apply. Instead, distributions by the Fund to holders of shares of AMPS would
constitute taxable interest income, whether or not they exceeded the earnings
and profits of the Fund, would be included in full in the income of the
recipient and would be taxed as ordinary income. Counsel believes that such a
position, if asserted by the IRS, would be unlikely to prevail.
The Fund will only purchase a Municipal Bond or Non-Municipal Tax-Exempt
Security if it is accompanied by an opinion of counsel to the issuer, which is
delivered on the date of issuance of the security, that the interest paid on
such security is excludable from gross income for Federal income tax and is
exempt from New Jersey personal income tax. The Fund intends to qualify to pay
"exempt-interest dividends" as defined in Section
34
852(b)(5) of the Code. Under such section if, at the close of each quarter of
its taxable year, at least 50% of the value of its total assets consists of
obligations that pay interest which is excludable from gross income for
Federal income tax purposes ("tax exempt obligations") under Section 103(a) of
the Code (relating generally to obligations of a state or local governmental
unit), the Fund shall be qualified to pay exempt-interest dividends to its
stockholders. Exempt-interest dividends are dividends or any part thereof paid
by the Fund that are attributable to interest on tax exempt obligations and
designated by the Fund as exempt-interest dividends in a written notice mailed
to the Fund's stockholders within 60 days after the close of its taxable year.
To the extent that the dividends distributed to the Fund's stockholders are
derived from interest income exempt from tax under Code Section 103(a) and are
properly designated as exempt-interest dividends, they will be excludable from
a stockholder's gross income for Federal tax purposes. Exempt-interest
dividends are included, however, in determining the portion, if any, of a
person's social security and railroad retirement benefits subject to Federal
income taxes. Each stockholder is advised to consult a tax adviser with
respect to whether exempt-interest dividends retain the exclusion under Code
Section 103(a) if such stockholder would be treated as a "substantial user" or
"related person" under Code Section 147(a) with respect to property financed
with the proceeds of an issue of "industrial development bonds" or "private
activity bonds," if any, held by the Fund.
The portion of the Fund's exempt interest distributions properly
identified in a year end statement as directly attributable to interest on New
Jersey Municipal Bonds and the portion of distributions attributable to gains
from New Jersey Municipal Bonds also will be exempt from New Jersey personal
income tax. In order to pass through tax exempt interest for New Jersey
personal income tax purposes, the Fund, among other requirements, must have
not less than 80% of the aggregate principal amount of its investments
invested in New Jersey Municipal Bonds at the close of each quarter of the tax
year (the "80% Test"). For purposes of calculating whether the 80% Test is
satisfied, financial options, futures, forward contracts and similar financial
instruments relating to interest-bearing obligations are excluded from the
principal amount of the Fund's investments. The Fund intends to comply with
this requirement so as to enable it to pass through interest exempt from both
Federal income tax and New Jersey personal income tax. In the event the Fund
does not so comply, distributions by the Fund may be taxable to stockholders
for New Jersey personal income tax purposes. However, regardless of whether
the Fund meets the 80% Test, all distributions attributable to interest earned
on Federal obligations will be exempt from New Jersey personal income tax.
Stockholders subject to income taxation by states other than New Jersey will
realize a lower after tax rate of return than New Jersey stockholders because
the dividends distributed by the Fund generally will not be exempt, to any
significant degree, from income taxation by such other states. The Fund will
inform stockholders annually as to the portion of the Fund's distributions
that constitutes exempt interest dividends and the portion that is exempt from
New Jersey personal income tax. To the extent attributable to exempt interest
dividends, interest on indebtedness incurred or continued to purchase or carry
Fund shares is not deductible for Federal income tax purposes and is not
deductible for New Jersey personal income tax purposes.
Exempt interest dividends and gains paid to a corporate stockholder will
be subject to New Jersey corporation business (franchise) tax and, if
applicable, the New Jersey corporation income tax. Accordingly, investors in
the Fund, including, in particular, corporate investors which may be subject
to the New Jersey corporation business (franchise) tax and, if applicable, the
New Jersey corporation income tax, should consult their tax advisors with
respect to the application of such taxes to an investment in the Fund, to the
receipt of the Fund dividends and as to their New Jersey tax situation in
general.
Under present New Jersey law, a RIC, such as the Fund, pays a flat tax of
$500 per year. The Fund might be subject to the New Jersey corporation
business (franchise) tax for any taxable year in which it does not qualify as
a RIC.
On February 21, 1997, the Tax Court of New Jersey ruled against the
Director of the Division of Taxation holding against the New Jersey
requirement that fund investors pay state taxes on interest their funds earned
from U.S. government securities if the 80% Test was not met. As a result of
the court decision, the State of New Jersey could be forced to pay substantial
amounts in tax refunds to state residents who are fund investors. At this
time, the effect of this litigation cannot be evaluated.
To the extent that the Fund's distributions are derived from interest on
its taxable investments or from an excess of net short-term capital gains over
net long-term capital losses ("ordinary income dividends"), such distributions
are considered ordinary income for Federal income tax purposes. Distributions
by the Fund, whether
35
from exempt-interest income, ordinary income or capital gains, are not
eligible for the dividends received deduction allowed to corporations under
the Code or the reduced tax rates available to non-corporate shareholders
pursuant to recent legislation. Distributions, if any, from an excess of net
long-term capital gains over net short-term capital losses derived from the
sale of securities or from certain transactions in futures or options
("capital gain dividends") are taxable as long-term capital gains for Federal
income tax purposes, regardless of the length of time the stockholder has
owned Fund shares and, for New Jersey income tax purposes, are treated as
capital gains that are taxed at ordinary income tax rates. Generally not later
than 60 days after the close of its taxable year, the Fund will provide its
stockholders with a written notice designating the amounts of any
exempt-interest dividends and capital gain dividends. If the Fund pays a
dividend in January which was declared in the previous October, November or
December to stockholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its stockholders on December 31 of the year in which such
dividend was declared.
All or a portion of the Fund's gain from the sale or redemption of tax
exempt obligations purchased at a market discount will be treated for Federal
income tax purposes as ordinary income rather than capital gain. This rule may
increase the amount of ordinary income dividends received by stockholders.
Distributions in excess of the Fund's earnings and profits will first reduce
the adjusted tax basis of a holder's shares and, after such adjusted tax basis
is reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset). The sale or exchange of AMPS could result
in capital gain or loss to holders of AMPS who hold their shares as capital
assets. Generally, a stockholder's gain or loss will be long-term capital gain
or loss if the shares have been held for more than one year. Any loss upon the
sale or exchange of Fund shares held for six months or less will be disallowed
to the extent of any exempt-interest dividends received by the stockholder. In
addition, any such loss that is not disallowed under the rule stated above
will be treated as long-term capital loss to the extent of any capital gain
dividends received by the stockholder.
If you borrow money to buy the Fund's AMPS, you may not be permitted to
deduct the interest on that loan. Under Federal income tax rules, the Fund's
AMPS may be treated as having been bought with borrowed money even if the
purchase cannot be traced directly to borrowed money. Stockholders should
consult their own tax advisers regarding the impact of an investment in AMPS
upon the deductibility of interest payable by the stockholder.
The IRS has taken the position in a revenue ruling that if a RIC has two
or more classes of shares, it may designate distributions made to each class
in any year as consisting of no more than such class's proportionate share of
particular types of income, including exempt-interest income and net long-term
capital gains. A class's proportionate share of a particular type of income is
determined according to the percentage of total dividends paid by the RIC
during such year that was paid to such class. Thus, the Fund is required to
allocate a portion of its net capital gain and other taxable income to the
shares of AMPS and Other AMPS of each series. Accordingly, the Fund intends to
designate dividends paid to the Series C AMPS and Other AMPS as tax exempt
interest, capital gains or other taxable income, as applicable, in proportion
to each series' share of total dividends paid during the year. The Fund may
notify the Auction Agent of the amount of any net capital gain and other
taxable income to be included in any dividend on shares of AMPS prior to the
Auction establishing the Applicable Rate for such dividend. The Fund also may
include such income in a dividend on shares of AMPS without giving advance
notice thereof if it increases the dividend by an additional amount calculated
as if such income were a Retroactive Taxable Allocation and the additional
amount were an Additional Dividend, provided that the Fund will notify the
Auction Agent of the additional amounts to be included in such dividend prior
to the applicable Dividend Payment Date. See "The Auction -- Auction
Procedures -- Auction Date; Advance Notice of Allocation of Taxable Income;
Inclusion of Taxable Income in Dividends" in the prospectus. Except for the
portion of any dividend that it informs the Auction Agent will be treated as
capital gains or other taxable income, the Fund anticipates that the dividends
paid on the shares of AMPS will constitute exempt-interest dividends. The
amount of net capital gain and ordinary income allocable to shares of AMPS
(the "taxable distribution") will depend upon the amount of such gains and
income realized by the Fund and the total dividends paid by the Fund on shares
of common stock and shares of the AMPS during a taxable year, but the taxable
distribution generally is not expected to be significant.
If the Fund makes a Retroactive Taxable Allocation, it will pay
Additional Dividends to holders of AMPS who are subject to the Retroactive
Taxable Allocation. See "Description of AMPS -- Dividends -- Additional
Dividends" in the prospectus. The Federal income tax consequences of
Additional Dividends under existing law are
36
uncertain. The Fund intends to treat a holder as receiving a dividend
distribution in the amount of any Additional Dividend only as and when such
Additional Dividend is paid. An Additional Dividend generally will be
designated by the Fund as an exempt-interest dividend except as otherwise
required by applicable law. However, the IRS may assert that all or part of an
Additional Dividend is a taxable dividend either in the taxable year for which
the Retroactive Taxable Allocation is made or in the taxable year in which the
Additional Dividend is paid.
In the opinion of Sidley Austin Brown & Wood LLP, counsel to the Fund,
under current law the manner in which the Fund intends to allocate items of
tax exempt income, net capital gain and other taxable income among shares of
common stock and shares of AMPS will be respected for Federal income tax
purposes. However, the tax treatment of Additional Dividends may affect the
Fund's calculation of each class's allocable share of capital gains and other
taxable income. In addition, there is currently no direct guidance from the
IRS or other sources specifically addressing whether the Fund's method for
allocating tax exempt income, net capital gain and other taxable income, if
any, among shares of common stock and shares of AMPS will be respected for
Federal income tax purposes, and it is possible that the IRS could disagree
with counsel's opinion and attempt to reallocate the Fund's net capital gain
or other taxable income. In the event of a reallocation, some of the dividends
identified by the Fund as exempt-interest dividends to holders of shares of
AMPS may be recharacterized as additional capital gains or other taxable
income. In the event of such recharacterization, the Fund would not be
required to make payments to such stockholders to offset the tax effect of
such reallocation. In addition, a reallocation may cause the Fund to be liable
for income tax and excise tax on any reallocated taxable income. Sidley Austin
Brown & Wood LLP has advised the Fund that, in its opinion, if the IRS were to
challenge in court the Fund's allocations of income and gain, the IRS would be
unlikely to prevail. A holder should be aware, however, that the opinion of
Sidley Austin Brown & Wood LLP represents only its best legal judgment and is
not binding on the IRS or the courts.
The Code subjects interest received on certain otherwise tax exempt
securities to a Federal alternative minimum tax. The Federal alternative
minimum tax applies to interest received on PABs issued after August 7, 1986.
PABs are bonds that, although tax exempt, are used for purposes other than
those performed by governmental units and that benefit non-governmental
entities (e.g., bonds used for industrial development or housing purposes).
Income received on such bonds is classified as an item of "tax preference,"
which could subject certain investors in such bonds, including stockholders of
the Fund, to an increased Federal alternative minimum tax. The Fund intends to
purchase such PABs and will report to stockholders at the close of the
calendar year-end the portion of its dividends declared during the year which
constitutes an item of tax preference for Federal alternative minimum tax
purposes. The Code further provides that corporations are subject to a Federal
alternative minimum tax based, in part, on certain differences between taxable
income as adjusted for other tax preferences and the corporation's "adjusted
current earnings," which more closely reflect a corporation's economic income.
Because an exempt-interest dividend paid by the Fund will be included in
adjusted current earnings, a corporate stockholder may be required to pay a
Federal alternative minimum tax on exempt-interest dividends paid by the Fund.
The Fund may invest in instruments the return on which includes
nontraditional features such as indexed principal or interest payments
("nontraditional instruments"). These instruments may be subject to special
tax rules under which the Fund may be required to accrue and distribute income
before amounts due under the obligations are paid. In addition, it is possible
that all or a portion of the interest payments on such nontraditional
instruments could be recharacterized as taxable ordinary income.
The Fund may engage in interest rate swaps. The Federal income tax rules
governing the taxation of interest rate swaps are not entirely clear and may
require the Fund to treat payments received under such arrangements as
ordinary income and to amortize payments under certain circumstances. Because
payments received by the Fund in connection with swap transactions will be
taxable rather than tax exempt, they may result in increased taxable
distributions to stockholders.
Certain transactions entered into by the Fund are subject to complex
Federal income tax provisions that may, among other things, (a) affect the
character of gains and losses realized, (b) disallow, suspend or otherwise
limit the allowance of certain losses or deductions, and (c) accelerate the
recognition of income. Operation of these tax rules could, therefore, affect
the character, amount and timing of distributions and result in increased
taxable distributions to stockholders. Special tax rules also will require the
Fund to mark-to-market certain types of positions in its portfolio (i.e.,
treat them as sold on the last day of the taxable year), and may result in the
recognition of income without a corresponding receipt of cash. The Fund
intends to monitor its transactions, make appropriate tax
37
elections and make appropriate entries in its books and records to lessen the
effect of these tax rules and avoid any possible disqualification for the
special treatment afforded RICs under the Code.
The Fund's ability to distribute dividends exempt from Federal income
tax depends on the exclusion from gross income of the interest income that it
receives on the securities in which it invests. The Fund will only purchase
Municipal Bonds if they are accompanied by an opinion of counsel to the
issuer, which is delivered on the date of issuance of that security, that
interest on such securities is excludable from gross income for Federal income
tax and exempt from New Jersey personal income tax (the "tax exemption
opinion").
Events occurring after the date of issuance of the Municipal Bonds
and Non-Municipal Tax Exempt Securities in which the Fund invests, however,
may cause the interest on such securities to be includable in gross income for
Federal income tax purposes. For example, the Code establishes certain
requirements, such as restrictions as to the investment of the proceeds of the
issue, limitations as to the use of proceeds of such issue and the property
financed by such proceeds, and the payment of certain excess earnings to the
Federal government, that must be met after the issuance of securities for
interest on such securities to remain excludable from gross income for Federal
income tax purposes. The issuers and the conduit borrowers of the Municipal
Bonds or Non-Municipal Tax Exempt Securities generally covenant to comply with
such requirements, and the tax exemption opinion generally assumes continuing
compliance with such requirements. Failure to comply with these continuing
requirements, however, may cause the interest on such securities to be
includable in gross income for Federal income tax purposes retroactive to
their date of issue.
In addition, the IRS has an ongoing enforcement program that involves the
audit of tax exempt bonds to determine whether an issue of bonds satisfies all
of the requirements that must be met for interest on such bonds to be
excludable from gross income for Federal income tax purposes. From time to
time, some of the securities held by the Fund may be the subject of such an
audit by the IRS, and the IRS may determine that the interest on such
securities is includable in gross income for Federal income tax purposes,
either because the IRS has taken a legal position adverse to the conclusion
reached by counsel to the issuer in the tax exemption opinion or as a result
of an action taken or not taken after the date of issue of such obligation. If
a Municipal Bond or Non-Municipal Tax Exempt Security in which the Fund
invests is determined to pay taxable interest subsequent to the Fund's
acquisition of such security, the IRS may demand that the Fund pay Federal
income taxes on the affected interest income. If the Fund agrees to do so, the
Fund's yield on its common stock could be adversely affected. A determination
that interest on a security held by the Fund is includable in gross income for
Federal income tax purposes retroactively to its date of issue may, likewise,
cause a portion of prior distributions received by stockholders, including
holders of AMPS, to be taxable to those stockholders in the year of receipt.
The Fund will not pay an Additional Dividend to a holder of AMPS under these
circumstances.
If at any time when shares of AMPS are outstanding the Fund does not meet
the asset coverage requirements of the 1940 Act, the Fund will be required to
suspend distributions to holders of common stock until the asset coverage is
restored. See "Description of AMPS -- Dividends -- Restrictions on Dividends
and Other Payments" and in the prospectus. This may prevent the Fund from
distributing at least 90% of its net income, and may, therefore, jeopardize
the Fund's qualification for taxation as a RIC. If the Fund were to fail to
qualify as a RIC, some or all of the distributions paid by the Fund would be
fully taxable for Federal income tax purposes. Upon any failure to meet the
asset coverage requirements of the 1940 Act, the Fund, in its sole discretion,
may, and under certain circumstances will be required to, redeem shares of
AMPS in order to maintain or restore the requisite asset coverage and avoid
the adverse consequences to the Fund and its stockholders of failing to
qualify as a RIC. See "Description of AMPS -- Redemption" herein and in the
prospectus. There can be no assurance, however, that any such action would
achieve such objectives.
As noted above, the Fund must distribute annually at least 90% of its net
taxable and tax exempt interest income. A distribution will only be counted
for this purpose if it qualifies for the dividends paid deduction under the
Code. Additional preferred stock that the Fund has authority to issue may
raise an issue as to whether distributions on such preferred stock are
"preferential" under the Code and therefore not eligible for the dividends
paid deduction. The Fund intends to issue preferred stock that counsel advises
will not result in the payment of a preferential dividend. If the Fund
ultimately relies on a legal opinion with regard to such preferred stock,
there is no assurance that the IRS would agree that dividends on the preferred
stock are not preferential. If the IRS successfully disallowed the dividends
paid deduction for dividends on the preferred stock, the Fund could lose the
benefit of the
38
special treatment afforded RICs under the Code. In this case, dividends paid
by the Fund would not be exempt from Federal income taxes. Additionally, the
Fund would be subject to Federal income tax, including the alternative minimum
tax.
Under certain Code provisions, some stockholders may be subject to a
withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Backup withholding may also be
required on distributions paid by the Fund, unless it reasonably estimates
that at least 95% of its distributions during the taxable year are comprised
of exempt interest dividends. Generally, stockholders subject to backup
withholding will be those for whom no certified taxpayer identification number
is on file with the Fund or who, to the Fund's knowledge, have furnished an
incorrect number. When establishing an account, an investor must certify under
penalty of perjury that such number is correct and that such investor is not
otherwise subject to backup withholding. Backup withholding is not an
additional tax. Any amount withheld generally may be allowed as a refund or a
credit against a shareholder's Federal income tax liability, provided, that
the required information is timely forwarded to the IRS.
The Fund is generally not an appropriate investment for retirement plans,
other entities that are not subject to tax and foreign stockholders.
State and Local Taxes
The exemption from Federal income tax for exempt interest dividends, and
from Federal income tax and New Jersey personal income tax for New Jersey
exempt interest distributions derived from interest or gains on New Jersey
Municipal Bonds (if certain requirements are met), does not necessarily result
in an exemption for such distributions under the income or other tax laws of
any state or local taxing authority. Stockholders are advised to consult their
own tax advisers concerning state and local matters.
In some states, the portion of any exempt-interest dividend that is
derived from interest received by a RIC on its holdings of that state's
securities and its political subdivisions and instrumentalities is exempt from
that state's income tax. Therefore, the Fund will report annually to its
stockholders the percentage of interest income earned by the Fund during the
preceding year on tax exempt obligations indicating, on a state-by-state
basis, the source of such income.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury Regulations promulgated thereunder. The Code and the Treasury
Regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Stockholders are urged to consult their tax advisers regarding specific
questions as to Federal, state, local or foreign taxes.
NET ASSET VALUE
Net asset value per share of common stock is determined Monday through
Friday as of the close of business on the NYSE (generally, the NYSE closes at
4:00 p.m., Eastern time), on each business day during which the NYSE is open
for trading. For purposes of determining the net asset value of a share of
common stock, the value of the securities held by the Fund plus any cash or
other assets (including interest accrued but not yet received) minus all
liabilities (including accrued expenses) and the aggregate liquidation value
of any outstanding shares of preferred stock is divided by the total number of
shares of common stock outstanding at such time. Expenses, including the fees
payable to the Investment Adviser, are accrued daily.
The Municipal Bonds and other portfolio securities in which the Fund
invests are traded primarily in over-the-counter ("OTC") municipal bond and
money markets and are valued at the last available bid price for long
positions and at the last available ask price for short positions in the OTC
market or on the basis of yield equivalents as obtained from one or more
dealers or pricing services approved by the Directors. One bond is the "yield
equivalent" of another bond when, taking into account market price, maturity,
coupon rate, credit rating and ultimate
39
return of principal, both bonds will theoretically produce an equivalent
return to the bondholder. Financial futures contracts and options thereon,
which are traded on exchanges, are valued at their settlement prices as of the
close of such exchanges. Short-term investments with a remaining maturity of
60 days or less are valued on an amortized cost basis, which approximates
market value, unless the Investment Adviser believes that this method no
longer produces fair valuations. Repurchase agreements will be valued at cost
plus accrued interest. The value of swaps, including interest rate swaps, caps
and floors, will be determined by obtaining dealer quotations. Repurchase
agreements will be valued at cost plus accrued interest. Securities and assets
for which market quotations are not readily available are valued at fair value
as determined in good faith by or under the direction of the Directors,
including valuations furnished by a pricing service retained by the Fund,
which may use a matrix system for valuations. The procedures of the pricing
service and its valuations are reviewed by the officers of the Fund under the
general supervision of the Directors.
The Fund makes available for publication the net asset value of its
shares of common stock determined as of the last business day each week.
Currently, the net asset values of shares of publicly traded closed-end
investment companies investing in debt securities are published in Barron's,
the Monday edition of The Wall Street Journal and the Monday and Saturday
editions of The New York Times.
FINANCIAL STATEMENTS
The Fund's audited financial statements for the fiscal year ended
November 30, 2003, together with the report of __________________ thereon, are
incorporated in this statement of additional information by reference to its
2003 Annual Report. The Fund's unaudited financial statements for the six
months ended May 31, 2004 are incorporated in this statement of additional
information by reference to its 2004 Semi-Annual Report. You may request a
copy of the Annual Report and the Semi-Annual Report at no charge by calling
(800) 543-6217 between 8:30 a.m. and 5:30 p.m. Eastern time on any business
day.
40
APPENDIX A
ECONOMIC AND OTHER CONDITIONS IN NEW JERSEY
The following information is a brief summary of factors affecting the
economy of the State of New Jersey and does not purport to be a complete
description of such factors. Other factors will affect issuers. The summary is
based primarily upon publicly available offering statements relating to debt
offerings of state and local issuers and other demographic information;
however, it has not been updated. The Fund has not independently verified this
information.
New Jersey (sometimes referred to herein as the "State") operates on a
fiscal year beginning July 1 and ending June 30. For example, "Fiscal Year
2004" refers to the State's fiscal year beginning July 1, 2003 and ending June
30, 2004.
The General Fund is the fund into which all State revenues, not otherwise
restricted by statute, are deposited and from which appropriations are made.
The largest part of the total financial operations of the State is accounted
for in the General Fund. Revenues received from taxes and unrestricted by
statute, most federal revenue and certain miscellaneous revenue items are
recorded in the General Fund.
The State's undesignated General Fund balance was $389 million for Fiscal
Year 2001, $292 million for Fiscal Year 2002 and $373 million for the Fiscal
Year 2003. For each of Fiscal Year 2004 and Fiscal Year 2005, the balance in
the undesignated General Fund is estimated to be $400 million.
The State finances certain capital projects primarily through the sale of
the general obligation bonds of the State. These bonds are backed by the full
faith and credit of the State. Certain state tax revenues and certain other
fees are pledged to meet the principal payments, interest payments and
redemption premium payments, if any, required to fully pay the debt. No
general obligation debt can be issued by the State without prior voter
approval, except that no voter approval is required for any law authorizing
the creation of a debt for a refinancing of all or any portion of the
outstanding debts or liabilities of the State, so long as such law requires
that the refinancing provide a debt service savings.
The State's economic base is diversified, consisting of a variety of
manufacturing, construction and service industries, supplemented by rural
areas with selective commercial agriculture.
New Jersey has been experiencing an economic slowdown similar to the rest
of the nation due to the economic recession that began in March 2001. Although
economic activity has remained sluggish in calendar year 2003, signs of
improving economic conditions are emerging.
New Jersey's employment increased by 0.5% in October 2003 over a year ago
adding 2,300 jobs for the month, continuing the positive year to year growth
trend for the seventh consecutive month since April 2003. Overall the State
added 29,000 jobs between January and October of 2003. However, the State
continues to suffer from job losses in manufacturing and downsizing in the
telecommunications industry.
The State's unemployment rate was 5.7% in October and remains below the
national rate, which was 6% for that month. The unemployment rate, which rose
to 6% during the second half of 2002 (up from 4.2% in 2001), was consistently
below 6% for the first six months in 2003. The unemployment rate rose to 6.1%
in July but stayed below 6% for three consecutive months since August 2003.
Although the growth in the job market is still weak, New Jersey's employment
level remained consistently above four million for the last six months since
April 2003.
The preliminary growth rate for New Jersey's personal income in the
second quarter of 2003 improved to 3.0% over the revised growth rate of 2.3%
for the first quarter of 2003. The latest upward revision for the third
quarter's GNP for the nation may be signaling an upward trend in New Jersey's
personal income growth in the coming quarters. Despite the weakness in the
labor market, low inflation (around 2%) continues to benefit New Jersey
consumers and businesses.
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Economic forecasts as of October 2003 for the national and State
economies project continued economic recovery in the fourth quarter of 2003
and in 2004. The Beige Book, released by the Federal Reserve Board on October
15, 2003, remains optimistic about further increases in economic activity, due
to stabilizing conditions in the manufacturing sector. A rebound has been
reported in business spending on computer hardware and software due to the
current replacement phase of the information technology cycle. Economic
activity is expected to accelerate in 2004. Continuing improvement in the
labor market will be necessary to keep the economy recovery on track.
New Jersey's economy is expected to follow the national trend in 2004.
Employment growth is projected to remain below 1% in 2003 but grow moderately
at 1+% in 2004. Personal income is expected to grow modestly around 4+% in
2004. After another strong year in 2002, the housing sector is still robust
but housing starts are expected to ease slightly in the coming months. New
vehicle registrations are projected to moderate but remain close to 630,000
units in 2003 and 2004. Inflation is expected to remain modest, around 2% in
2004. Low interest rates continue to support spending on housing and other
consumer durables in the State.
To a large extent, the future direction of economic recovery nationally
and in New Jersey hinges on assumptions of no further terrorist attacks,
supportive monetary and fiscal stimulus and no further turmoil in the
financial markets.
The State and the nation may experience further near-term slow growth and
the expected recovery may stall into early 2004 if consumers, investors, and
businesses become more cautious than currently assumed. However, the
fundamentals of the State's economic health remain stable and the long run
prospects for economic growth of the State in 2004 and beyond are favorable.
Tort, Contract and Other Claims. At any given time, there are various
numbers of claims and cases pending against the State, State agencies and
employees, seeking recovery of monetary damages that are primarily paid out of
the fund created pursuant to the New Jersey Tort Claims Act (N.J.S.A. 59:1-1,
et seq.). The State does not formally estimate its reserve representing
potential exposure for these claims and cases. The State is unable to estimate
its exposure for these claims and cases.
The State routinely receives notices of claims seeking substantial sums
of money. The majority of those claims have historically proven to be of
substantially less value than the amount originally claimed. Under the New
Jersey Tort Claims Act, any tort litigation against the State must be preceded
by a notice of claim, which affords the State the opportunity for a six-month
investigation prior to the filing of any suit against it.
In addition, at any given time, there are various numbers of contract and
other claims against the State and State agencies, including environmental
claims asserted against the State, among other parties, arising from the
alleged disposal of hazardous waste. Claimants in such matters are seeking
recovery of monetary damages or other relief which, if granted, would require
the expenditure of funds. The State is unable to estimate its exposure for
these claims.
At any given time, there are various numbers of claims and cases pending
against the University of Medicine and Dentistry and its employees, seeking
recovery of monetary damages that are primarily paid out of the Self Insurance
Reserve Fund created pursuant to the New Jersey Tort Claims Act (N.J.S.A.
59:1-1, et seq.). An independent study estimated an aggregate potential
exposure of $84,070,000 for tort and medical malpractice claims pending as of
June 30, 2003. In addition, at any given time, there are various numbers of
contract and other claims against the University of Medicine and Dentistry,
seeking recovery of monetary damages or other relief which, if granted, would
require the expenditure of funds. The State is unable to estimate its exposure
for these claims.
Buena Regional Commercial Township et al. v. New Jersey Department of
Education et al. This lawsuit was filed in Superior Court, Chancery Division,
Cumberland County. This lawsuit was filed on December 9, 1997, on behalf of 17
rural school districts seeking the same type of relief as has been mandated to
be provided to the poor urban school districts in Abbott v. Burke. The
plaintiffs requested a declaratory judgment stating that the chancery court
retain jurisdiction, pending the remanding of the matter to the Commissioner
of Education for a hearing. The chancery court did not retain jurisdiction.
Once the matter was transferred to the Commissioner, plaintiffs moved to amend
their pleadings and have done so three times. With each new pleading, the
State has answered with a motion
A-2
to dismiss. Decisions on the first two motions to dismiss were rendered moot
by plaintiffs' filing of a subsequent amended pleading. On February 24, 2000,
the Commissioner decided the State's final motion to dismiss and ordered that
the matter be transmitted to the Office of Administrative Law ("OAL") for a
hearing limited to whether each petitioning district has fully effectuated the
provisions of the Comprehensive Educational Improvement and Financing Act
("CEIFA"), including the provisions for early childhood program aid and
demonstrably effective program aid. The State is unable at this time to
estimate its exposure for this claim and intends to defend this suit
vigorously. On December 29, 2000 the Administrative Law Judge ("ALJ") rendered
a decision finding that all of the petitioning school districts established
that they were using CEIFA funding appropriately and recommended that the
second part of the hearing process move forward. Subsequently, with a
modification as to the standard of review, the Commissioner affirmed the ALJ's
decision. The matter was remanded to the OAL to determine whether educational
deficiencies exist in the districts and, if so, whether the deficiencies are
linked to the funding formula. On September 26, 2002, the ALJ issued an
Initial Decision, finding that five of the seventeen petitioning school
districts were unable to provide a thorough and efficient education to their
students. As a remedy, the ALJ recommended full "Abbott" funding for these
five districts. On November 9, 2002, the parties submitted written exceptions
to the Initial Decision. Of the twelve (12) districts that were unsuccessful
in demonstrating a failure to provide a thorough and efficient education to
their students and therefore no remedy was proposed by the ALJ, only six filed
exceptions that the ALJ was incorrect as to them.
Following a review of the Initial Decision, exceptions and record, the
Commissioner, on February 10, 2003, adopted in part and rejected in part the
Initial Decision. The Commissioner rejected the finding that Buena Regional,
Commercial, Fairfield and Woodbine met the standard for "special needs
district" status. The Commissioner adopted the finding that Salem City meets
the standard for special needs status and will recommend to the Legislature
that Salem be included within CEIFA's definition of an "Abbott District."
Additionally, the Commissioner adopted the finding that the other twelve
petitioning districts did not demonstrate that CEIFA is insufficient to enable
them to provide a thorough and efficient education to their students. In the
cases of Buena Regional, Commercial, Fairfield, Salem City and Woodbine, the
Commissioner directed the respective County Superintendents to undertake
thorough reviews of the districts' 2003-04 budgets to determine their
sufficiency to provide a thorough and efficient education as well as to ensure
the appropriate use of Early Childhood Program Aid and Demonstrably Effective
Program Aid. The Commissioner further directed the County Superintendents to
take any appropriate actions, including fund reallocation, to target areas of
particular need. Finally, the Commissioner determined that it may be
appropriate to trigger his powers pursuant to N.J.S.A. 18A:7F-6 if the reviews
of the respective County Superintendents so merit. On March 6, 2003, ten of
the districts appealed the decision of the Commissioner of Education to the
State Board of Education. On July 2, 2003, two of the districts withdrew their
appeals.
United Hospitals et al. v. State of New Jersey and William Waldman et al.
There are several matters under the above caption, as well as Atlantic City
Medical Center v. Squarrell and In re Zurbrugg Memorial Hospital's 1995
Medicaid Rates. There are several matters involving approximately 40 hospitals
challenging Medicaid hospital reimbursement rates for rate years 1995 through
2001. The matters were filed in the Appellate Division of the Superior Court
of New Jersey and in the Office of Administrative Law. The hospitals challenge
some or all of the following: (i) whether the State complied with certain
federal requirements for Medicaid reimbursement; (ii) whether the State's
reimbursement regulations, N.J.A.C. 10:52-1 et seq., including the
regulations' interpretation of marginal loss are arbitrary, capricious and
unreasonable, (iii) whether the Department of Human Services ("DHS")
incorrectly calculated the rates; (iv) whether DHS denied hospitals a
meaningful appeal process; (v) whether the 1996-97 State Appropriations Act
(L.1996, c.42) violated the New Jersey Constitution with respect to the
provision for Medicaid reimbursement to hospitals; and (vi) whether DHS
violated the Medicaid State Plan, filed with the U.S. Department of Health and
Human Services, in implementing hospital rates since 1995. The Appellate
Division has remanded some of these matters to the Division of Medical
Assistance and Health Services to make further findings. The State intends to
vigorously defend these actions. United Hospitals is in bankruptcy and this
case has been settled with respect to United Hospitals.
Abbott V Appeals. Abbott districts, in furtherance of the Court's
decision in Abbott v. Burke ("Abbott V") and Department of Education (the
"Department") regulations, have developed operational plans for the provision
of early childhood programs. In February of 1999, the Department informed each
of the districts of the Department's concerns regarding each district's plan,
and asked that amended plans be submitted to the Department. The Abbott
districts filed individual petitions of appeal with the Commissioner of
Education. Issues on appeal include the
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quality of community care providers, the requirement that districts
collaborate with DHS-licensed facilities, the use of certificated teachers,
requests for full day preschool, accreditation of early childhood programs,
and as-applied constitutional challenges to N.J.A.C. 6:19A-1 et seq. In
response to the filed petitions, the State filed answers or motions in lieu of
answers. The matters were transmitted to the Office of Administrative Law
("OAL") for further proceedings. To date, one of the original thirteen
districts that filed petitions for the 1999-2000 school year remains active.
The State is facilitating the expedition of the remaining early childhood
appeal from 1999-2000 in the OAL and will vigorously defend the Department's
actions.
2001-2002 Abbott District Appeals. Several Abbott districts filed
administrative petitions of appeal to the Commissioner of Education regarding
departmental decisions rendered on approved programs and funding for the
2001-2002 school year. Additionally, four districts filed appeals on behalf of
each of the schools in their districts challenging the Department's
determinations on each school's Whole School Reform Plan/School-Based Budgets.
The matters involving three of the districts have been amicably resolved. With
regard to the fourth district, Elizabeth, upon notice by the district, the
initial decisions of the Administrative Law Judge were not acted upon by the
Commissioner and, instead, the matter was dismissed as withdrawn by the
district. Also, eleven districts filed petitions of appeal on DOE decisions
awarding additional Abbott v. Burke State aid seeking, in total, over $353
million in additional aid. The districts disagree with the Department's
findings of budget reallocations, revenues and the final award of additional
Abbott v. Burke State aid. Motions to dismiss in lieu of answers were filed in
four of the eleven districts. The State's motion to dismiss the petition in
one of the eleven districts was granted and the remaining matters were
transferred to the Office of Administrative Law for hearing. Amicable
resolutions were reached in ten of the eleven districts. The State is actively
attempting to finalize the resolution of the Elizabeth matter. Finally, the
Education Law Center ("ELC") filed a petition and amended petition challenging
the decisions and non-decisions of the Department in this regard on behalf of
students in the thirty Abbott districts. Generally, the ELC takes issue with
the Department's process and decisions regarding additional Abbott v. Burke
State aid. On August 24, 2001, the State filed a motion for summary decision
in lieu of answer and will continue to vigorously defend this appeal.
2003-2004 Abbott District Supplemental Funding Appeals. On March 30,
2003, the Department of Education (the "Department") issued decisions to
twenty-five Abbott districts that requested additional Abbott v. Burke State
aid. On June 6, 2003, twenty-three of the 25 districts receiving decisions
filed appeals of the decisions with the Commissioner of Education. There are
three primary issues in the appeals: (i) whether the maintenance standard
applied by the Department is invalid without Court approval, (ii) whether the
maintenance standard was properly applied by the district budget and (iii)
whether determinations to eliminate ineffective/inefficient programs in the
district were correct. The appeals were transmitted to the Office of
Administrative Law (the "OAL") and, pursuant to the Supreme Court's scheduling
order of May 20, 2003 (the "Scheduling Order"), hearings were scheduled to
proceed between July 1 and July 23, 2003, with initial decisions being
rendered by July 28, 2003, and the Commissioner's determinations to follow
within 25 days thereafter. On July 7, 2003, the Supreme Court granted the
State's motion to modify the Scheduling Order so as to postpone the
administrative hearings until after the Supreme Court rules on the
"maintenance" standard applied by the Department to the Abbott district
budgets, with initial decisions being rendered thirty days thereafter. On July
10, 2003, the Supreme Court heard oral argument on the maintenance standard.
An order was issued by the Supreme Court on July 23, 2003. The Supreme Court
granted the State's motion to treat the 2003-2004 school fiscal year as a
maintenance year for purposes of calculating the additional Abbott v. Burke
State aid for the Abbott districts. A maintenance budget shall mean that a
school district will be funded at a level such that the district can implement
current approved programs, services and positions and therefore includes
documented increases in non-discretionary expenditures. The State budget for
fiscal year 2004 includes $50 million in additional base aid for Abbott
districts to fund increases in maintenance budgets, as well as their share of
$37 million in additional special education aid given to all school districts.
Within 30 days of the Supreme Court's order, the Department was required to
issue revised budgets for the 2003-2004 school year to the school districts.
On August 27, 2003, the Department issued new decisions to the 23 districts
with pending appeals. Each of these districts have determined to maintain an
appeal of the Department's August 27th decision. The OAL proceeded with
hearings on these matters and was required to issue its Initial Decisions by
September 26, 2003. However, as a result of difficulties in completing the
hearings by that date, the State and the ELC entered into a consent agreement,
which extended the deadline to October 3, 2003 for the OAL to issue its
Initial Decisions.
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On March 5, 2004, the Appellate Division issued decisions on fifteen of
the twenty remaining district appeals. Six of the fifteen appeals were
resolved as moot because of the decision rendered February 26, 2004 in Asbury
Park, et al v. Department of Education on the regulation standard and/or
because of the issuance of the February 5, 2004 final maintenance budget
decisions. Four of the fifteen appeals affirmed the determination of
Commissioner. Finally, five of the fifteen appeals overturned some portion of
the Commissioner's determination below and were therefore remanded for
recalculation, within 10 days, of the final maintenance budget worksheet
consistent with the opinion. On March 9, 2004, decisions were issued in four
of the districts. The Appellate Division affirmed the decisions below with
regard to two districts. In Phillipsburg, the decision below was upheld with
the exception of a change in the percentage for non-discretionary increase in
teachers' salaries. New Brunswick was remanded for additional proceedings on
two cost increases with the court affirming the remaining issues. On March 19,
2004, the Appellate Division issued its decision in the district appeal for
one district, affirming in part and reversing in part.
On April 30, 2004, Phillipsburg filed a petition for certification with
the Supreme Court, along with a motion to hear the matter out of time,
challenging the March 9, 2004 Appellate Division decision. The Department will
vigorously defend this appeal.
The developments in these matters indicate that additional funding of
approximately $20 million may be required for Fiscal Year 2004 to meet the
districts' needs. This amount could be increased or decreased during the
appeal process. The State believes that it will have adequate revenues to
satisfy any additional expenditures, without adversely affecting the State's
finances.
Challenge to Department of Education Regulations (N.J.A.C. 6A:10-1.2,
-3.1, -4.2 and -4.7). On or about October 6, 2003, an appeal was filed in the
New Jersey Superior Court, Appellate Division, challenging the validity of the
emergency regulations promulgated by the Commissioner of Education to govern
the 2003-2004 budget process of the Abbott districts, including, but not
limited to, a challenge to basing the maintenance budget on actual Fiscal Year
2003 expenditures instead of Fiscal Year 2003 budgeted amounts. The challenge
to the regulations was brought on behalf of five Abbott districts.
Specifically, the districts are challenging the regulations as inconsistent
with the July 23, 2003 Order of the Supreme Court in Abbott v. Burke. On
January 13, 2004, the Appellate Division heard argument on the regulation
challenge.
On January 26, 2004, the Appellate Division rendered its decision and
upheld the Commissioner's authority to promulgate regulations and upheld the
facial validity of the regulatory definition of "non-instructional," as well
as the regulatory standards for inefficient/ineffective funding
determinations. The decision, however, invalidated the regulatory definition
of "maintenance budget" as applied to the calculation of the preliminary
maintenance budget only. The Appellate Division directed the issuance of
revised preliminary maintenance budget figures by February 5, 2004. On
February 4, 2004, the Department filed a notice of petition for certification
with the New Jersey Supreme Court seeking review of that portion of the
January 26, 2004 decision which found the maintenance budget standard invalid.
On February 5, 2004, as directed by the Appellate Division, the
Department notified the districts of the revised preliminary budgets and
issued financial maintenance budget figures. On February 9, 2004, appellants
filed a motion for emergent relief in aid of litigants' rights and/or for
clarification and for attorney's fees. On February 16, 2004, the Appellate
Division denied appellant's motion for emergent relief in aid of litigants'
rights because the Department acted in conformance with the Appellate
Division's decision regarding the issuance of revised preliminary maintenance
budget figures and because the decision did not deal with the validity of the
Department of Education's maintenance budget standard as applied to the final
maintenance budget figures. The Appellate Division also denied appellants'
motion for clarification on jurisdictional grounds.
On February 19, 2004, the Supreme Court issued an order, sua sponte,
remanding the motion for clarification regarding the validity of the
maintenance budget standard as applied to the final decisions, and conferring
jurisdiction so that the motion could be resolved on the merits. On February
26, 2004, the Appellate Division issued a supplemental opinion upholding the
validity of the maintenance budget regulations as applied to the final
decisions. Thereafter, on March 1, 2004, appellants filed for emergent,
summary relief with the Supreme Court. On March 5, 2004, a response brief on
behalf of the Department was filed consistent with the Court's scheduling
order. Given the affirmative ruling on February 26, 2004, the Department
withdrew its notice of petition
A-5
for certification seeking review of the earlier January 26, 2004, decision.
The Supreme Court heard oral argument on March 15, 2004, regarding appellants'
request for emergent, summary relief. On March 18, 2004, the Supreme Court
issued an order granting appellants' motion for summary relief. Therein, the
Court determined that the Department's methodology of awarding supplemental
funding for those programs, positions and services approved and provided in
2002-2003 was inconsistent with its July 23, 2003 Order. The Department was
directed to recalculate the districts' maintenance budgets based on programs,
positions and services approved in 2002-2003. Given that most of the 2003-2004
school year is almost over, the Court granted districts the ability to make
applications to the Department by May 1, 2004, for 25% of the recalculated
supplemental funding award.
The State estimates that additional funding of $100 million may be
required for Fiscal Year 2004 should the plaintiffs prevail. The State
believes that it will have adequate revenues to satisfy any additional
expenditures without adversely affecting the State's finances.
Abbott 2004-2005 Early Childhood Plan Appeals. On January 15, 2004, the
Department of Education issued decisions to Abbott districts concerning their
2004-2005 preschool programs. Pursuant to a June 24, 2003 scheduling order
from the Supreme Court in Abbott v. Burke, districts had 30 days to appeal the
determination. Nine districts filed appeals within the appeal period.
Additionally, a tenth district filed its petition several days late, along
with a nunc pro tunc motion. On March 9, 2004, the first Initial Decision was
issued in the Vineland case. Therein, the Administrative Law Judge affirmed
the early childhood plan decision with the exception of the proration of
salaries for certain classrooms with less than fifteen students. On April 2,
2004, the Commissioner adopted the Administrative Law Judge's Initial Decision
as his own. Four districts have withdrawn their appeals. Initial Decisions
have been rendered in the cases of five of the districts. In all instances,
the challenged issues were upheld in favor of the Department. On April 16,
2004 and April 19, 2004, the Commissioner adopted the Initial Decision in two
of the districts. Thereafter, the Commissioner adopted the Initial Decisions
in three of the cases. No appeals have been taken of the Commissioner's
adoption of the Initial Decisions.
Southern New Jersey Light Rail Group v. New Jersey Transit Corporation.
On July 31, 2002, New Jersey Transit Corporation's contractor for the
construction of the Southern New Jersey Light Rail Transit Project filed suit
in the Law Division, Essex County alleging over $100 million in damages and
claims on the project. The contractor, Southern New Jersey Rail Group (a
consortium of Bechtel Infrastructure and Bombardier), alleges breach of
contract, breach of the covenant of good faith and fair dealing, equitable
adjustment, unjust enrichment and negligent misrepresentation resulting from
alleged delays caused by New Jersey Transit and changes in the contract work
for which the plaintiff alleges it is entitled to be compensated. The State
will vigorously defend this matter.
New Jersey Education Association et al. v. State of New Jersey et al.
This matter was filed in the New Jersey Superior Court, Law Division, Mercer
County. Plaintiff's complaint alleges that the State violated various
constitutional provisions, statutes and common law by failing to fund the
Teachers' Pension and Annuity Fund ("TPAF") in the amount and manner
prescribed by law while increasing the contribution paid by employees who
participate in the fund from 3% to 5%. In particular, plaintiffs allege that
the Treasurer failed to submit to the Legislature a request for the monies
certified by the TPAF's actuary to be necessary to fund the State's
contribution to the TPAF for Fiscal Year 2004 and that the State Legislature
failed to properly fund the TPAF as required by law and required the local
school boards to increase the employees' contributions from 3% to 5% in
violation of applicable law.
Plaintiffs are seeking a judgment declaring that defendants' failure to
"properly and adequately fund" the TPAF violates various constitutional and
statutory provisions, including provisions of the Internal Revenue Code of
1986. In their complaint, plaintiffs ask that the defendants be directed to
make a payment into the TPAF in the approximate amount of $484 million, or in
the alternative, that the employees' contribution be maintained at 3% and not
increased. In addition, plaintiffs are seeking attorneys fees, disbursement
and costs pursuant to 42 U.S.C. ss.188 or any other legal basis. On April 28,
2004, the State moved to dismiss the complaint for failure to state a claim
upon which relief can be granted. Oral argument on the motion was scheduled
for June 11, 2004. The State will vigorously defend this matter.
Currently, the State of New Jersey's general obligation bonds are rated
AA by Standard & Poor's, a division of The McGraw Hill Companies, Inc., Aa2 by
Moody's Investor's Service, Inc. and AA by Fitch, Inc.
A-6
Additionally, on March 10, 2004, Moody's placed the State's general obligation
bonds on a rating watch for possible downgrade. From time to time, agencies
may change their ratings.
A-7
APPENDIX B
DESCRIPTION OF MUNICIPAL BOND RATINGS
Description of Moody's Investors Service, Inc.'s ("Moody's") Bond Ratings
Aaa Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present, but certain protective elements may be lacking
or may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes
bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with
respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a
ranking in the lower end of that generic rating category.
B-1
Description of Moody's U.S. Short-Term Ratings
MIG 1/VMIG 1 This designation denotes superior credit quality. Excellent
protection is afforded by established cash flows, highly
reliable liquidity support, or demonstrated broad-based
access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes strong credit quality. Margins of
protection are ample, although not as large as in the
preceding group.
MIG 3/VMIG 3 This designation denotes acceptable credit quality.
Liquidity and cash-flow protection may be narrow, and market
access for refinancing is likely to be less
well-established.
SG This designation denotes speculative-grade credit quality.
Debt instruments in this category may lack sufficient
margins of protection.
Description of Moody's Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of short term promissory obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well established industries; high rates of return
on funds employed; conservative capitalization structures with moderate
reliance on debt and ample asset protection; broad margins in earning coverage
of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of short term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes to the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Description of Standard & Poor's, a Division of The McGraw-Hill Companies,
Inc. ("Standard & Poor's"), Debt Ratings
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations or a specific program.
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation.
The issue credit rating is not a recommendation to purchase, sell or hold
a financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The issue credit ratings are based on current information furnished by
the obligors or obtained by Standard & Poor's from other sources Standard &
Poor's considers reliable. Standard & Poor's does not perform an audit in
connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result
of changes in, or unavailability of, such information, or based on other
circumstances.
B-2
The issue credit ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of payment--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded to, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
Long Term Issue Credit Ratings
AAA An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. Capacity to meet its financial commitment on
the obligation is extremely strong.
AA An obligation rated "AA" differs from the highest rated issues
only in small degree. The Obligor's capacity to meet its
financial commitment on the obligation is very strong.
A An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories. However, the
obligor's capacity to meet its financial commitment on the
obligation is still strong.
BBB An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of
the obligor to meet its financial commitment on the obligation.
BB An obligation rated "BB," "B," "CCC," "CC" and "C" are regarded
B as having significant speculative characteristics. "BB" indicates
CCC the least degree of speculation and "C" the highest degree of
CC speculation. While such debt will likely have some quality and
C protective characteristics, these may be outweighed by large
uncertainties or major risk exposures to adverse conditions.
D An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on
the date due even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made
during such grace period. The "D" rating also will be used upon
the filing of a bankruptcy petition or the taking of similar
action if payments on an obligation are jeopardized.
c The 'c' subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase
tendered bonds if the long term credit rating of the issuer is
below an investment-grade level and/or the issuer's bonds are
deemed taxable.
p The letter 'p' indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project
financed by the debt being rated and indicates that payment of debt
service requirements is largely or entirely dependent upon the
successful, timely completion of the project. This rating, however,
while addressing credit quality subsequent to the completion of the
project, makes no comment on the likelihood of or the risk of
default upon failure of such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
* Continuance of the ratings is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows.
r This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or
volatility of expected returns which are not addressed in the
credit rating.
B-3
N.R. This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that
Standard & Poor's does not rate a particular obligation as a matter
of policy.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
Description of Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no
more than 365 days. Ratings are graded into several categories, ranging from
"A-1" for the highest-quality obligations to "D" for the lowest. These
categories are as follows:
A-1 A short-term obligation rated "A-1" is rated in the highest
category by Standard & Poor's. The obligor's capacity to meet its
financial commitment on the obligation is strong. Within this
category, certain obligations are designated with a plus sign
(+). This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.
A-2 A short-term obligation rated "A-2" is somewhat more susceptible
to the adverse effects of changes in circumstances and economic
conditions than obligations in higher rating categories. However,
the obligor's capacity to meet its financial commitment on the
obligation is satisfactory.
A-3 A short-term obligation rated "A-3" exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of
the obligor to meet its financial commitment on the obligation.
B A short-term obligation rated "B" is regarded as having
significant speculative characteristics. The obligor currently
has the capacity to meet its financial commitment on the
obligation; however, it faces major ongoing uncertainties which
could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C A short-term obligation rated "C" is currently vulnerable to
nonpayment and is dependent upon favorable business, financial
and economic conditions for the obligor to meet its financial
commitment on the obligation.
D A short-term obligation rated "D" is in payment default. The "D"
rating category is used when interest payments or principal
payments are not made on the date due even if the applicable
grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The "D"
rating will also be used upon the filing of a bankruptcy petition
or the taking of a similar action if payments on an obligation
are jeopardized.
c The "c" subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase
tendered bonds if the long term credit rating of the issuer is
below an investment-grade level and/or the issuer's bonds are
deemed taxable.
p The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the
project financed by the debt being rated and indicates that
payment of debt service requirements is largely or entirely
dependent upon the successful, timely completion of the project.
This rating, however, while addressing credit quality subsequent
to completion of the project, makes no comment on the likelihood
of or the risk of default upon failure of such completion. The
investor should exercise his own judgment with respect to such
likelihood and risk.
* Continuance of the ratings is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing
r The "r" highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high
volatility or high variability in expected returns as a result
of noncredit risks. Examples
B-4
of such obligations are securities with principal or interest
return indexed to equities, commodities, or currencies; certain
swaps and options, and interest-only and principal-only mortgage
securities. The absence of an "r" symbol should not be taken as
an indication that an obligation will exhibit no volatility or
variability in total return.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long term debt rating. The following criteria will be used in making
that assessment.
--Amortization schedule--the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.
--Source of payment--the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt service
is given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the
term of the notes.
SP-3 Speculative capacity to pay principal and interest.
Description of Fitch Ratings' ("Fitch") Investment Grade Bond Ratings
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations
of a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided
by insurance policies or financial guarantees unless otherwise indicated.
Bonds carrying the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect
small differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information.
B-5
Ratings may be changed, suspended, or withdrawn as a result of changes in, or
the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability
to pay interest and repay principal, which is unlikely to be
affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds
rated "AAA." Because bonds rated in the "AAA" and "AA"
categories are not significantly vulnerable to foreseeable
future developments, short term debt of these issuers is
generally rated "F-1+."
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable
to adverse changes in economic conditions and circumstances than
bonds with higher ratings.
BBB Bonds considered to be investment grade and of
satisfactory-credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
Description of Fitch's Speculative Grade Bond Ratings
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation. The rating takes into consideration special features of the
issue, its relationship to other obligations of the issuer, the current and
prospective financial condition and operating performance of the issuer and
any guarantor, as well as the economic and political environment that might
affect the issuer's future financial strength.
Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by
adverse economic changes. However, business and financial
alternatives can be identified which could assist the obligor in
satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and the
need for reasonable business and economic activity throughout
the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal.
B-6
D Bonds are in default on interest and/or principal payments. Such
DD bonds are extremely speculative and should be valued on the
DDD basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest
potential for recovery on these bonds, and "D" represents the
lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a
rating symbol to indicate the relative position of a credit
within the rating category. Plus and minus signs, however, are
not used in the "DDD," "DD," or "D" categories.
Description of Fitch's Short term Ratings
Fitch's short term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and investment notes.
The short term rating places greater emphasis than a long term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for
timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than
issues rated "F-1+."
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned "F-1+"
and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D Default. Issues assigned this rating are in actual or imminent
payment default.
LOC The symbol "LOC" indicates that the rating is based on a letter
of credit issued by a commercial bank.
NR Indicates that Fitch does not rate the specific issue.
Conditional A conditional rating is premised on the successful completion of
a project or the occurrence of a specific event.
Suspended A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
Withdrawn A rating will be withdrawn when an issue matures or is called or
refinanced and, at Fitch's discretion, when an issuer fails to
furnish proper and timely information.
B-7
FitchAlert Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the
likely direction of such change. These are designated as
"Positive," indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be raised
or lowered. FitchAlert is relatively short term, and should be
resolved within 12 months.
Ratings Outlook: An outlook is used to describe the most likely direction of
any rating change over the intermediate term. It is described as "Positive" or
"Negative." The absence of a designation indicates a stable outlook.
B-8
APPENDIX C
SETTLEMENT PROCEDURES
The following summary of Settlement Procedures sets forth the procedures
expected to be followed in connection with the settlement of each Auction and
will be incorporated by reference in the Auction Agent Agreement and each
Broker-Dealer Agreement. Nothing contained in this Appendix C constitutes a
representation by the Fund that in each Auction each party referred to herein
actually will perform the procedures described herein to be performed by such
party. Capitalized terms used herein shall have the respective meanings
specified in the Glossary in the prospectus or this Appendix C hereto, as the
case may be.
(a) On each Auction Date, the Auction Agent shall notify by telephone or
through the Auction Agent's Processing System the Broker-Dealers that
participated in the Auction held on such Auction Date and submitted an Order
on behalf of any Beneficial Owner or Potential Beneficial Owner of:
(i) the Applicable Rate fixed for the next succeeding Dividend
Period;
(ii) whether Sufficient Clearing Bids existed for the determination
of the Applicable Rate;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer") submitted a
Bid or a Sell Order on behalf of a Beneficial Owner, the number of
shares, if any, of AMPS to be sold by such Beneficial Owner;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a
Bid on behalf of a Potential Beneficial Owner, the number of shares, if
any, of AMPS to be purchased by such Potential Beneficial Owner;
(v) if the aggregate number of shares of AMPS to be sold by all
Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid or a
Sell Order exceeds the aggregate number of shares of AMPS to be purchased
by all Potential Beneficial Owners on whose behalf such Broker-Dealer
submitted a Bid, the name or names of one or more Buyer's Broker-Dealers
(and the name of the Agent Member, if any, of each such Buyer's
Broker-Dealer) acting for one or more purchasers of such excess number of
shares of AMPS and the number of such shares to be purchased from one or
more Beneficial Owners on whose behalf such Broker-Dealer acted by one or
more Potential Beneficial Owners on whose behalf each of such Buyer's
Broker-Dealers acted;
(vi) if the aggregate number of shares of AMPS to be purchased by
all Potential Beneficial Owners on whose behalf such Broker-Dealer
submitted a Bid exceeds the aggregate number of shares of AMPS to be sold
by all Beneficial Owners on whose behalf such Broker-Dealer submitted a
Bid or a Sell Order, the name or names of one or more Seller's
Broker-Dealers (and the name of the Agent Member, if any, of each such
Seller's Broker-Dealer) acting for one or more sellers of such excess
number of shares of AMPS and the number of such shares to be sold to one
or more Potential Beneficial Owners on whose behalf such Broker-Dealer
acted by one or more Beneficial Owners on whose behalf each of such
Seller's Broker-Dealers acted; and
(vii) the Auction Date of the next succeeding Auction with respect
to the AMPS.
(b) On each Auction Date, each Broker-Dealer that submitted an Order on
behalf of any Beneficial Owner or Potential Beneficial Owner shall:
(i) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer,
instruct each Potential Beneficial Owner on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in whole or in part, to
instruct such Potential Beneficial Owner's Agent Member to pay to such
Broker-Dealer (or its Agent Member) through the Securities Depository the
amount necessary to purchase the number of shares of AMPS to be purchased
pursuant to such Bid against receipt of such shares and advise such
Potential Beneficial Owner of the Applicable Rate for the next succeeding
Dividend Period;
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(ii) in the case of a Broker-Dealer that is a Seller's
Broker-Dealer, instruct each Beneficial Owner on whose behalf such
Broker-Dealer submitted a Sell Order that was accepted, in whole or in
part, or a Bid that was accepted, in whole or in part, to instruct such
Beneficial Owner's Agent Member to deliver to such Broker-Dealer (or its
Agent Member) through the Securities Depository the number of shares of
AMPS to be sold pursuant to such Order against payment therefor and
advise any such Beneficial Owner that will continue to hold shares of
AMPS of the Applicable Rate for the next succeeding Dividend Period;
(iii) advise each Beneficial Owner on whose behalf such
Broker-Dealer submitted a Hold Order of the Applicable Rate for the next
succeeding Dividend Period;
(iv) advise each Beneficial Owner on whose behalf such Broker-Dealer
submitted an Order of the Auction Date for the next succeeding Auction;
and
(v) advise each Potential Beneficial Owner on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in whole or in part, of
the Auction Date for the next succeeding Auction.
(c) On the basis of the information provided to it pursuant to (a) above,
each Broker-Dealer that submitted a Bid or a Sell Order on behalf of a
Potential Beneficial Owner or a Beneficial Owner shall, in such manner and at
such time or times as in its sole discretion it may determine, allocate any
funds received by it pursuant to (b)(i) above and any shares of AMPS received
by it pursuant to (b)(ii) above among the Potential Beneficial Owners, if any,
on whose behalf such Broker-Dealer submitted Bids, the Beneficial Owners, if
any, on whose behalf such Broker-Dealer submitted Bids that were accepted or
Sell Orders, and any Broker-Dealer or Broker-Dealers identified to it by the
Auction Agent pursuant to (a)(v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Beneficial Owner and Beneficial Owner shall
instruct its Agent Member as provided in (b)(i) or (ii) above, as the
case may be;
(ii) each Seller's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through
the Securities Depository to the Agent Member of the Beneficial Owner
delivering shares to such Broker-Dealer pursuant to (b)(ii) above the
amount necessary to purchase such shares against receipt of such shares,
and (B) deliver such shares through the Securities Depository to a
Buyer's Broker-Dealer (or its Agent Member) identified to such Seller's
Broker-Dealer pursuant to (a)(v) above against payment therefor; and
(iii) each Buyer's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through
the Securities Depository to a Seller's Broker-Dealer (or its Agent
Member) identified pursuant to (a)(vi) above the amount necessary to
purchase the shares to be purchased pursuant to (b)(i) above against
receipt of such shares, and (B) deliver such shares through the
Securities Depository to the Agent Member of the purchaser thereof
against payment therefor.
(e) On the day after the Auction Date:
(i) each Bidder's Agent Member referred to in (d)(i) above shall
instruct the Securities Depository to execute the transactions described
in (b)(i) or (ii) above, and the Securities Depository shall execute such
transactions;
(ii) each Seller's Broker-Dealer or its Agent Member shall instruct
the Securities Depository to execute the transactions described in
(d)(ii) above, and the Securities Depository shall execute such
transactions; and
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(iii) each Buyer's Broker-Dealer or its Agent Member shall instruct
the Securities Depository to execute the transactions described in
(d)(iii) above, and the Securities Depository shall execute such
transactions.
(f) If a Beneficial Owner selling shares of AMPS in an Auction fails to
deliver such shares (by authorized book-entry), a Broker-Dealer may deliver to
the Potential Beneficial Owner on behalf of which it submitted a Bid that was
accepted a number of whole shares of AMPS that is less than the number of
shares that otherwise was to be purchased by such Potential Beneficial Owner.
In such event, the number of shares of AMPS to be so delivered shall be
determined solely by such Broker-Dealer. Delivery of such lesser number of
shares shall constitute good delivery. Notwithstanding the foregoing terms of
this paragraph (f), any delivery or non-delivery of shares which shall
represent any departure from the results of an Auction, as determined by the
Auction Agent, shall be of no effect unless and until the Auction Agent shall
have been notified of such delivery or non-delivery in accordance with the
provisions of the Auction Agent Agreement and the Broker-Dealer Agreements.
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APPENDIX D
AUCTION PROCEDURES
The following procedures will be set forth in provisions of the Articles
Supplementary relating to the AMPS, and will be incorporated by reference in
the Auction Agent Agreement and each Broker-Dealer Agreement. The terms not
defined below are defined in the prospectus or in the Glossary in the
prospectus. Nothing contained in this Appendix D constitutes a representation
by the Fund that in each Auction each party referred to herein actually will
perform the procedures described herein to be performed by such party.
Paragraph 10(a) Certain Definitions.
As used in this Paragraph 10, the following terms shall have the
following meanings, unless the context otherwise requires:
(i) "AMPS" shall mean the shares of AMPS being auctioned pursuant to
this Paragraph 10.
(ii) "Auction Date" shall mean the first Business Day preceding the
first day of a Dividend Period.
(iii) "Available AMPS" shall have the meaning specified in Paragraph
10(d)(i) below.
(iv) "Bid" shall have the meaning specified in Paragraph 10(b)(i)
below.
(v) "Bidder" shall have the meaning specified in Paragraph 10(b)(i)
below.
(vi) "Hold Order" shall have the meaning specified in Paragraph
10(b)(i) below.
(vii) "Maximum Applicable Rate" for any Dividend Period will be the
higher of the Applicable Percentage of the Reference Rate or the
Applicable Spread plus the Reference Rate. The Applicable Percentage and
the Applicable Spread will be determined based on the lower of the credit
rating or ratings assigned on such date to such shares by Moody's and S&P
(or if Moody's or S&P or both shall not make such rating available, the
equivalent of either or both of such ratings by a Substitute Rating
Agency or two Substitute Rating Agencies or, in the event that only one
such rating shall be available, such rating) as follows:
Applicable Applicable Applicable Applicable
Credit Ratings Percentage Percentage Spread Over Spread Over
------------------------------------------------
of Reference of Reference Reference Reference
Rate--No Rate-- Rate--No Rate--
Moody's S&P Notification Notification Notification Notification
---------------------- ------------------------ ---------------- ---------------- ---------------- ----------------
Aaa AAA 110% 125% 1.10% 1.25%
Aa3 to Aa1 AA- to AA+ 125% 150% 1.25% 1.50%
A3 to A1 A- to A+ 150% 200% 1.50% 2.00%
Baa3 to Baa1 BBB- to BBB+ 175% 250% 1.75% 2.50%
Below Baa3 Below BBB- 200% 300% 2.00% 3.00%
The Applicable Percentage and the Applicable Spread as so determined may
be further subject to upward but not downward adjustment in the discretion of
the Board of Directors of the Fund after consultation with the Broker-Dealers,
provided that immediately following any such increase the Fund would be in
compliance with the AMPS Basic Maintenance Amount. Subject to the provisions
of paragraph 12 of the Articles Supplementary entitled "Termination of Rating
Agency Provisions," the Fund shall take all reasonable action necessary to
enable S&P and Moody's to provide a rating for the AMPS. If either S&P or
Moody's shall not make such a rating available or if neither S&P nor Moody's
shall make such a rating available, subject to the provisions of paragraph 12
of the Articles Supplementary entitled "Termination of Rating Agency
Provisions," Merrill Lynch, Pierce, Fenner & Smith
D-1
Incorporated or its affiliates and successors, after obtaining the Fund's
approval, shall select a NRSRO or two NRSROs to act as a Substitute Rating
Agency or Substitute Rating Agencies, as the case may be.
(viii) "Order" shall have the meaning specified in Paragraph
10(b)(i) below.
(ix) "Sell Order" shall have the meaning specified in Paragraph
10(b)(i) below.
(x) "Submission Deadline" shall mean 1:00 p.m., Eastern time, on any
Auction Date or such other time on any Auction Date as may be specified
by the Auction Agent from time to time as the time by which each
Broker-Dealer must submit to the Auction Agent in writing all Orders
obtained by it for the Auction to be conducted on such Auction Date.
(xi) "Submitted Bid" shall have the meaning specified in Paragraph
10(d)(i) below.
(xii) "Submitted Hold Order" shall have the meaning specified in
Paragraph 10(d)(i) below.
(xiii) "Submitted Order" shall have the meaning specified in
Paragraph 10(d)(i) below.
(xiv) "Submitted Sell Order" shall have the meaning specified in
Paragraph 10(d)(i) below.
(xv) "Sufficient Clearing Bids" shall have the meaning specified in
Paragraph 10(d)(i) below.
(xvi) "Winning Bid Rate" shall have the meaning specified in
Paragraph 10(d)(i) below.
Paragraph 10(b) Orders by Beneficial Owners, Potential Beneficial Owners,
Existing Holders And Potential Holders.
(i) Unless otherwise permitted by the Fund, Beneficial Owners and
Potential Beneficial Owners may only participate in Auctions through their
Broker-Dealers. Broker-Dealers will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves as Existing Holders in respect of shares
subject to Orders submitted or deemed submitted to them by Beneficial Owners
and as Potential Holders in respect of shares subject to Orders submitted to
them by Potential Beneficial Owners. A Broker-Dealer may also hold shares of
AMPS in its own account as a Beneficial Owner. A Broker-Dealer may thus submit
Orders to the Auction Agent as a Beneficial Owner or a Potential Beneficial
Owner and therefore participate in an Auction as an Existing Holder or
Potential Holder on behalf of both itself and its customers. On or prior to
the Submission Deadline on each Auction Date:
(A) each Beneficial Owner may submit to its Broker-Dealer
information as to:
(1) the number of outstanding shares, if any, of AMPS held by
such Beneficial Owner which such Beneficial Owner desires to
continue to hold without regard to the Applicable Rate for the next
succeeding Dividend Period;
(2) the number of outstanding shares, if any, of AMPS held by
such Beneficial Owner which such Beneficial Owner desires to
continue to hold, provided that the Applicable Rate for the next
succeeding Dividend Period shall not be less than the rate per annum
specified by such Beneficial Owner; and/or
(3) the number of outstanding shares, if any, of AMPS held by
such Beneficial Owner which such Beneficial Owner offers to sell
without regard to the Applicable Rate for the next succeeding
Dividend Period; and
(B) each Broker-Dealer, using a list of Potential Beneficial Owners
that shall be maintained in good faith for the purpose of conducting a
competitive Auction, shall contact Potential Beneficial Owners, including
Persons that are not Beneficial Owners, on such list to determine the
number of
D-2
outstanding shares, if any, of AMPS which each such Potential Beneficial
Owner offers to purchase, provided that the Applicable Rate for the next
succeeding Dividend Period shall not be less than the rate per annum
specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or the communication by a
Broker-Dealer acting for its own account to the Auction Agent, of information
referred to in clause (A) or (B) of this Paragraph 10(b)(i) is hereinafter
referred to as an "Order" and each Beneficial Owner and each Potential
Beneficial Owner placing an Order, including a Broker-Dealer acting in such
capacity for its own account, is hereinafter referred to as a "Bidder"; an
Order containing the information referred to in clause (A)(1) of this
Paragraph 10(b)(i) is hereinafter referred to as a "Hold Order"; an Order
containing the information referred to in clause (A)(2) or (B) of this
Paragraph 10(b)(i) is hereinafter referred to as a "Bid"; and an Order
containing the information referred to in clause (A)(3) of this Paragraph
10(b)(i) is hereinafter referred to as a "Sell Order." Inasmuch as a
Broker-Dealer participates in an Auction as an Existing Holder or a Potential
Holder only to represent the interests of a Beneficial Owner or Potential
Beneficial Owner, whether it be its customers or itself, all discussion herein
relating to the consequences of an Auction for Existing Holders and Potential
Holders also applies to the underlying beneficial ownership interests
represented.
(ii) (A) A Bid by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of outstanding shares of AMPS specified in such
Bid if the Applicable Rate determined on such Auction Date shall be
less than the rate per annum specified in such Bid; or
(2) such number or a lesser number of outstanding shares of
AMPS to be determined as set forth in Paragraph 10(e)(i)(D) if the
Applicable Rate determined on such Auction Date shall be equal to
the rate per annum specified therein; or
(3) a lesser number of outstanding shares of AMPS to be
determined as set forth in Paragraph 10(e)(ii)(C) if such specified
rate per annum shall be higher than the Maximum Applicable Rate and
Sufficient Clearing Bids do not exist.
(B) A Sell Order by an Existing Holder shall constitute an
irrevocable offer to sell:
(1) the number of outstanding shares of AMPS specified in such
Sell Order, or
(2) such number or a lesser number of outstanding shares of
AMPS to be determined as set forth in Paragraph 10(e)(ii)(C) if
Sufficient Clearing Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable
offer to purchase:
(1) the number of outstanding shares of AMPS specified in such
Bid if the Applicable Rate determined on such Auction Date shall be
higher than the rate per annum specified in such Bid; or
(2) such number or a lesser number of outstanding shares of
AMPS to be determined as set forth in Paragraph 10(e)(i)(E) if the
Applicable Rate determined on such Auction Date shall be equal to
the rate per annum specified therein.
Paragraph 10(c) Submission of Orders by Broker-Dealers to Auction Agent.
(i) Each Broker-Dealer shall submit in writing or through a mutually
acceptable electronic means to the Auction Agent prior to the Submission
Deadline on each Auction Date all Orders obtained by such Broker-Dealer,
designating itself (unless otherwise permitted by the Fund) as an Existing
Holder in respect of shares subject to Orders submitted or deemed submitted to
it by Beneficial Owners and as a Potential Holder in respect of shares subject
to Orders submitted to it by Potential Beneficial Owners, and specifying with
respect to each Order:
D-3
(A) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Fund);
(B) the aggregate number of outstanding shares of AMPS that are the
subject of such Order;
(C) to the extent that such Bidder is an Existing Holder
(1) the number of outstanding shares, if any, of AMPS subject
to any Hold Order placed by such Existing Holder;
(2) the number of outstanding shares, if any, of AMPS subject
to any Bid placed by such Existing Holder and the rate per annum
specified in such Bid; and
(3) the number of outstanding shares, if any, of AMPS subject
to any Sell Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate per
annum specified in such Potential Holder's Bid.
(ii) If any rate per annum specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent shall round such
rate up to the next highest one-thousandth (.001) of 1%.
(iii) If an Order or Orders covering all of the outstanding shares of
AMPS held by an Existing Holder are not submitted to the Auction Agent prior
to the Submission Deadline, the Auction Agent shall deem a Hold Order (in the
case of an Auction relating to a Dividend Period which is not a Special
Dividend Period of more than 28 days) and a Sell Order (in the case of an
Auction relating to a Special Dividend Period of more than 28 days) to have
been submitted on behalf of such Existing Holder covering the number of
outstanding shares of AMPS held by such Existing Holder and not subject to
Orders submitted to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder covering in
the aggregate more than the number of outstanding shares of AMPS held by such
Existing Holder are submitted to the Auction Agent, such Orders shall be
considered valid as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder shall
be considered valid up to and including the number of outstanding shares
of AMPS held by such Existing Holder; provided that if more than one Hold
Order is submitted on behalf of such Existing Holder and the number of
shares of AMPS subject to such Hold Orders exceeds the number of
outstanding shares of AMPS held by such Existing Holder, the number of
shares of AMPS subject to each of such Hold Orders shall be reduced pro
rata so that such Hold Orders, in the aggregate, cover exactly the number
of outstanding shares of AMPS held by such Existing Holder;
(B) any Bids submitted on behalf of such Existing Holder shall be
considered valid, in the ascending order of their respective rates per
annum if more than one Bid is submitted on behalf of such Existing
Holder, up to and including the excess of the number of outstanding
shares of AMPS held by such Existing Holder over the number of shares of
AMPS subject to any Hold Order referred to in Paragraph 10(c)(iv)(A)
above (and if more than one Bid submitted on behalf of such Existing
Holder specifies the same rate per annum and together they cover more
than the remaining number of shares that can be the subject of valid Bids
after application of Paragraph 10(c)(iv)(A) above and of the foregoing
portion of this Paragraph 10(c)(iv)(B) to any Bid or Bids specifying a
lower rate or rates per annum, the number of shares subject to each of
such Bids shall be reduced pro rata so that such Bids, in the aggregate,
cover exactly such remaining number of shares); and the number of shares,
if any, subject to Bids not valid under this Paragraph 10(c)(iv)(B) shall
be treated as the subject of a Bid by a Potential Holder; and
(C) any Sell Order shall be considered valid up to and including the
excess of the number of outstanding shares of AMPS held by such Existing
Holder over the number of shares of AMPS subject to
D-4
Hold Orders referred to in Paragraph 10(c)(iv)(A) and Bids referred to in
Paragraph 10(c)(iv)(B); provided that if more than one Sell Order is
submitted on behalf of any Existing Holder and the number of shares of
AMPS subject to such Sell Orders is greater than such excess, the number
of shares of AMPS subject to each of such Sell Orders shall be reduced
pro rata so that such Sell Orders, in the aggregate, cover exactly the
number of shares of AMPS equal to such excess.
(v) If more than one Bid is submitted on behalf of any Potential Holder,
each Bid submitted shall be a separate Bid with the rate per annum and number
of shares of AMPS therein specified.
(vi) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior
to the Submission Deadline on any Auction Date shall be irrevocable.
Paragraph 10(d) Determination of Sufficient Clearing Bids, Winning Bid Rate
and Applicable Rate.
(i) Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent shall assemble all Orders submitted or deemed submitted to it by
the Broker-Dealers (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or
as a "Submitted Order") and shall determine:
(A) the excess of the total number of outstanding shares of AMPS
over the number of outstanding shares of AMPS that are the subject of
Submitted Hold Orders (such excess being hereinafter referred to as the
"Available AMPS");
(B) from the Submitted Orders whether the number of outstanding
shares of AMPS that are the subject of Submitted Bids by Potential
Holders specifying one or more rates per annum equal to or lower than the
Maximum Applicable Rate exceeds or is equal to the sum of:
(1) the number of outstanding shares of AMPS that are the
subject of Submitted Bids by Existing Holders specifying one or more
rates per annum higher than the Maximum Applicable Rate, and
(2) the number of outstanding shares of AMPS that are subject
to Submitted Sell Orders (if such excess or such equality exists
(other than because the number of outstanding shares of AMPS in
clauses (1) and (2) above are each zero because all of the
outstanding shares of AMPS are the subject of Submitted Hold
Orders), such Submitted Bids by Potential Holders hereinafter being
referred to collectively as "Sufficient Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the lowest rate per annum
specified in the Submitted Bids (the "Winning Bid Rate") that if:
(1) each Submitted Bid from Existing Holders specifying the
Winning Bid Rate and all other submitted Bids from Existing Holders
specifying lower rates per annum were rejected, thus entitling such
Existing Holders to continue to hold the shares of AMPS that are the
subject of such Submitted Bids, and
(2) each Submitted Bid from Potential Holders specifying the
Winning Bid Rate and all other Submitted Bids from Potential Holders
specifying lower rates per annum were accepted, thus entitling the
Potential Holders to purchase the shares of AMPS that are the
subject of such Submitted Bids, would result in the number of shares
subject to all Submitted Bids specifying the Winning Bid Rate or a
lower rate per annum being at least equal to the Available AMPS.
D-5
(ii) Promptly after the Auction Agent has made the determinations
pursuant to Paragraph 10(d)(i), the Auction Agent shall advise the Fund of the
Maximum Applicable Rate and, based on such determinations, the Applicable Rate
for the next succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate for
the next succeeding Dividend Period shall be equal to the Winning Bid
Rate;
(B) if Sufficient Clearing Bids do not exist (other than because all
of the outstanding shares of AMPS are the subject of Submitted Hold
Orders), that the Applicable Rate for the next succeeding Dividend Period
shall be equal to the Maximum Applicable Rate; or
(C) if all of the outstanding shares of AMPS are the subject of
Submitted Hold Orders, the Dividend Period next succeeding the Auction
automatically shall be the same length as the immediately preceding
Dividend Period and the Applicable Rate for the next succeeding Dividend
Period shall be equal to 60% of the Reference Rate (or 90% of such rate
if the Fund has provided notification to the Auction Agent prior to
establishing the Applicable Rate for any dividend that net capital gain
or other taxable income will be included in such dividend on shares of
AMPS) on the date of the Auction.
Paragraph 10(e) Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares.
Based on the determinations made pursuant to Paragraph 10(d)(i), the
Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the
Auction Agent shall take such other action as set forth below:
(i) If Sufficient Clearing Bids have been made, subject to the provisions
of Paragraph 10(e)(iii) and Paragraph 10(e)(iv), Submitted Bids and Submitted
Sell Orders shall be accepted or rejected in the following order of priority
and all other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be accepted
and the Submitted Bid of each of the Existing Holders specifying any rate
per annum that is higher than the Winning Bid Rate shall be accepted,
thus requiring each such Existing Holder to sell the outstanding shares
of AMPS that are the subject of such Submitted Sell Order or Submitted
Bid;
(B) the Submitted Bid of each of the Existing Holders specifying any
rate per annum that is lower than the Winning Bid Rate shall be rejected,
thus entitling each such Existing Holder to continue to hold the
outstanding shares of AMPS that are the subject of such Submitted Bid;
(C) the Submitted Bid of each of the Potential Holders specifying
any rate per annum that is lower than the Winning Bid Rate shall be
accepted;
(D) the Submitted Bid of each of the Existing Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be rejected,
thus entitling each such Existing Holder to continue to hold the
outstanding shares of AMPS that are the subject of such Submitted Bid,
unless the number of outstanding shares of AMPS subject to all such
Submitted Bids shall be greater than the number of outstanding shares of
AMPS ("Remaining Shares") equal to the excess of the Available AMPS over
the number of outstanding shares of AMPS subject to Submitted Bids
described in Paragraph 10(e)(i)(B) and Paragraph 10(e)(i)(C), in which
event the Submitted Bids of each such Existing Holder shall be accepted,
and each such Existing Holder shall be required to sell outstanding
shares of AMPS, but only in an amount equal to the difference between (1)
the number of outstanding shares of AMPS then held by such Existing
Holder subject to such Submitted Bid and (2) the number of shares of AMPS
obtained by multiplying (x) the number of Remaining Shares by (y) a
fraction the numerator of which shall be the number of outstanding shares
of AMPS held by such Existing Holder subject to such Submitted Bid and
the denominator of which shall be the sum of the numbers of outstanding
shares of AMPS subject to such Submitted Bids made by all such Existing
Holders that specified a rate per annum equal to the Winning Bid Rate;
and
D-6
(E) the Submitted Bid of each of the Potential Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be accepted
but only in an amount equal to the number of outstanding shares of AMPS
obtained by multiplying (x) the difference between the Available AMPS and
the number of outstanding shares of AMPS subject to Submitted Bids
described in Paragraph 10(e)(i)(B), Paragraph 10(e)(i)(C) and Paragraph
10(e)(i)(D) by (y) a fraction the numerator of which shall be the number
of outstanding shares of AMPS subject to such Submitted Bid and the
denominator of which shall be the sum of the number of outstanding shares
of AMPS subject to such Submitted Bids made by all such Potential Holders
that specified rates per annum equal to the Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than because
all of the outstanding shares of AMPS are subject to Submitted Hold Orders),
subject to the provisions of Paragraph 10(e)(iii), Submitted Orders shall be
accepted or rejected as follows in the following order of priority and all
other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate
per annum that is equal to or lower than the Maximum Applicable Rate
shall be rejected, thus entitling such Existing Holder to continue to
hold the outstanding shares of AMPS that are the subject of such
Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any rate
per annum that is equal to or lower than the Maximum Applicable Rate
shall be accepted, thus requiring such Potential Holder to purchase the
outstanding shares of AMPS that are the subject of such Submitted Bid;
and
(C) the Submitted Bids of each Existing Holder specifying any rate
per annum that is higher than the Maximum Applicable Rate shall be
accepted and the Submitted Sell Orders of each Existing Holder shall be
accepted, in both cases only in an amount equal to the difference between
(1) the number of outstanding shares of AMPS then held by such Existing
Holder subject to such Submitted Bid or Submitted Sell Order and (2) the
number of shares of AMPS obtained by multiplying (x) the difference
between the Available AMPS and the aggregate number of outstanding shares
of AMPS subject to Submitted Bids described in Paragraph 10(e)(ii)(A) and
Paragraph 10(e)(ii)(B) by (y) a fraction the numerator of which shall be
the number of outstanding shares of AMPS held by such Existing Holder
subject to such Submitted Bid or Submitted Sell Order and the denominator
of which shall be the number of outstanding shares of AMPS subject to all
such Submitted Bids and Submitted Sell Orders.
(iii) If, as a result of the procedures described in Paragraph 10(e)(i)
or Paragraph 10(e)(ii), any Existing Holder would be entitled or required to
sell, or any Potential Holder would be entitled or required to purchase, a
fraction of a share of AMPS on any Auction Date, the Auction Agent shall, in
such manner as in its sole discretion it shall determine, round up or down the
number of shares of AMPS to be purchased or sold by any Existing Holder or
Potential Holder on such Auction Date so that each outstanding share of AMPS
purchased or sold by each Existing Holder or Potential Holder on such Auction
Date shall be a whole share of AMPS.
(iv) If, as a result of the procedures described in Paragraph 10(e)(i),
any Potential Holder would be entitled or required to purchase less than a
whole share of AMPS on any Auction Date, the Auction Agent, in such manner as
in its sole discretion it shall determine, shall allocate shares of AMPS for
purchase among Potential Holders so that only whole shares of AMPS are
purchased on such Auction Date by any Potential Holder, even if such
allocation results in one or more of such Potential Holders not purchasing any
shares of AMPS on such Auction Date.
(v) Based on the results of each Auction, the Auction Agent shall
determine, with respect to each Broker-Dealer that submitted Bids or Sell
Orders on behalf of Existing Holders or Potential Holders, the aggregate
number of the outstanding shares of AMPS to be purchased and the aggregate
number of outstanding shares of AMPS to be sold by such Potential Holders and
Existing Holders and, to the extent that such aggregate number of outstanding
shares to be purchased and such aggregate number of outstanding shares to be
sold differ, the Auction Agent shall determine to which other Broker-Dealer or
Broker-Dealers acting for one or more purchasers such Broker-Dealer shall
deliver, or from which other Broker-Dealer or Broker-Dealers acting for one or
more sellers such Broker-Dealer shall receive, as the case may be, outstanding
shares of AMPS.
D-7
Paragraph 10(f) Miscellaneous.
The Fund may interpret the provisions of this Paragraph 10 to resolve any
inconsistency or ambiguity, remedy any formal defect or make any other change
or modification that does not substantially adversely affect the rights of
Beneficial Owners of AMPS. A Beneficial Owner or an Existing Holder (A) may
sell, transfer or otherwise dispose of shares of AMPS only pursuant to a Bid
or Sell Order in accordance with the procedures described in this Paragraph 10
or to or through a Broker-Dealer, provided that in the case of all transfers
other than pursuant to Auctions such Beneficial Owner or Existing Holder, its
Broker-Dealer, if applicable, or its Agent Member advises the Auction Agent of
such transfer and (B) except as otherwise required by law, shall have the
ownership of the shares of AMPS held by it maintained in book entry form by
the Securities Depository in the account of its Agent Member, which in turn
will maintain records of such Beneficial Owner's beneficial ownership. Neither
the Fund nor any affiliate (other than Merrill Lynch, Pierce, Fenner & Smith
Incorporated) shall submit an Order in any Auction. Any Beneficial Owner that
is an affiliate (other than Merrill Lynch, Pierce, Fenner & Smith
Incorporated) shall not sell, transfer or otherwise dispose of shares of AMPS
to any person other than the Fund. All of the outstanding shares of AMPS shall
be represented by a single certificate registered in the name of the nominee
of the Securities Depository unless otherwise required by law or unless there
is no Securities Depository. If there is no Securities Depository, at the
Fund's option and upon its receipt of such documents as it deems appropriate,
any shares of AMPS may be registered in the Stock Register in the name of the
Beneficial Owner thereof and such Beneficial Owner thereupon will be entitled
to receive certificates therefor and required to deliver certificates thereof
or upon transfer or exchange thereof.
D-8
PART C. OTHER INFORMATION
Item 24. Financial Statements And Exhibits.
(1) Financial Statements
Part A:
Financial Highlights for the six months ended May 31, 2003 and each
of the fiscal years in the ten-year period ended November 30, 2003.
Part B:
Schedule of Investments of the Fund as of November 30, 2003.*
Statement of Net Assets of the Fund as of November 30, 2003.*
Statement of Operations of the Fund for the fiscal year ended
November 30, 2003.*
Statements of Changes in Net Assets of the Fund for the fiscal years
ended November 30, 2002 and 2003.*
Financial Highlights of the Fund for each of the fiscal years in the
five-year period ended November 30, 2003.*
Report of Independent Auditors.*
Schedule of Investments of the Fund as of May 31, 2004.**
Statement of Net Assets of the Fund as of May 31, 2004.**
Statement of Operations of the Fund for the six months ended May 31,
2004.**
Statements of Changes in Net Assets of the Fund for the six months
ended May 31, 2004.**
Financial Highlights of the Fund for the six months ended May 31,
2004 and each of the fiscal years in the five-year period ended
November 30, 2003.**
* Incorporated by reference to the Registrant's Annual Report to
Shareholders for the fiscal year ended November 30, 2003 filed with the
Securities and Exchange Commission ("Commission") on January 26, 2004
pursuant to Rule 30b2-1 under the Investment Company Act of 1940, as
amended ("1940 Act").
** Incorporated by reference to the Registrant's Semi-Annual Report to
Shareholders for the six month period ended May 31, 2004 filed with the
Commission on July [31], 2004 pursuant to Rule 30b2-1 under the 1940 Act.
Exhibits Description
-------- -----------
(a)(1) Articles of Incorporation of the Registrant.(a)
(a)(2) Articles of Transfer.
(a)(3) Articles Supplementary creating the Series A of Auction
Market Preferred Stock ("AMPS") of the Registrant.(a)
(a)(4) Articles of Amendment to the Articles Supplementary of the
Series A AMPS, dated November 30, 1994.(a)
(a)(5) Articles of Amendment to the Articles Supplementary of the
Series A AMPS, dated November 30, 1994.(a)
(a)(6) Form of Articles Supplementary creating the Series B AMPS of
the Registrant.(b)
(a)(7) Articles of Amendment to Articles Supplementary of the
Series A and Series B AMPS, dated June 23, 1999.
(a)(8) Articles of Amendment to the Articles Supplementary, dated
July 9, 2004.
(a)(9) Form of Articles Supplementary creating Series C AMPS.
(b) By-laws of the Registrant.(a)
(c) Not applicable.
(d)(1) Portions of the Articles of Incorporation, By-laws and
Articles Supplementary of the Registrant defining the rights
of holders of shares of the Registrant.(c)
(d)(2) Form of specimen certificate for the Series C AMPS of the
Registrant.
(e) Form of Automatic Dividend Reinvestment Plan.
(f) Not applicable.
(g) Form of Investment Advisory Agreement between the Registrant
and Fund Asset Management, L.P. ("FAM" or the "Investment
Adviser").(a)
(h)(1) Form of Purchase Agreement between the Registrant and
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") relating to the AMPS.
C-1
(h)(2) Form of Merrill Lynch Standard Dealer Agreement.(d)
(i) Not applicable.
(j) Form of Custodian Agreement between the Registrant and The
Bank of New York ("BONY").(e)
(k)(l) Form of Registrar, Transfer Agency, Dividend Disbursing
Agency and Shareholder Servicing Agency Agreement between
the Registrant and BONY.(a)
(k)(2) Form of Agreement of Resignation, Appointment and Acceptance
among the Registrant, IBJ Whitehall Bank & Trust Company and
BONY.(f)
(k)(3) Form of Administrative Services Agreement between the
Registrant and State Street Bank & Trust Company ("State
Street").(g)
(k)(4) Form of Auction Agent Agreement between the Registrant and
BONY.
(k)(5) Form of Broker-Dealer Agreement.(h)
(k)(6) Form of Letter of Representations.
(l) Opinion and Consent of Sidley Austin Brown & Wood LLP.*
(m) Not applicable.
(n) Consent of , independent auditors for the Registrant.*
(o) Not applicable.
(p) Not applicable.
(q) Not applicable.
(r) Code of Ethics.(i)
----------------
(a) Filed with the Securities and Exchange Commission (the "Commission") on
November 8, 1999 as an exhibit to Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-14 (File No. 333-88483).
(b) Filed with the Commission on October 5, 1999 as an exhibit to the
Registrant's initial Registration Statement on Form N-14.
(c) Reference is made to Article V, Article VI (sections 2, 3, 4, 5 and 6),
Article VII, Article VIII, Article X, Article XI, Article XII and
Article XIII of the Registrant's Articles of Incorporation, filed as
Exhibit 1(a) hereto; to Article II, Article III (sections 1, 2, 3, 5
and 17), Article VI, Article VII, Article XII, Article XIII and Article
XIV of the Registrant's By-Laws filed as Exhibit (b) hereto; and to the
Articles Supplementary and Articles of Amendment filed as Exhibit
(a)(4), (a)(5), (a)(6), (a)(7), (a)(8) and (a)(9).
(d) Incorporated by reference to Exhibit (h)(2) to Pre-Effective Amendment
No. 3 to the Registration Statement on Form N-2 of Preferred Income
Strategies, Inc. (File No. 333-102712), filed on March 25, 2003.
(e) Incorporated by reference to Exhibit 7 to Post-Effective Amendment No.
13 to the Registration Statement on Form N-1A of The Asset Program,
Inc. (File No. 333-53887), filed on March 21, 2002.
(f) Incorporated by reference to an exhibit to the Registration Statement
on Form N-14 of MuniYield Fund, Inc. (File No. 333-65242), filed on
September 14, 2001.
(g) Incorporated by reference to exhibit 8(d) to Post-Effective Amendment
No. 1 to the Registration Statement on Form N-1A of Merrill Lynch Focus
Twenty Fund, Inc. (File No. 333-89775) filed on March 20, 2001.
(h) Incorporated by reference to Exhibit (k)(5) to the Registration
Statement on Form N-2 of MuniYield Insured Fund, Inc. (File No.
333-116604) filed on June 8, 2004.
(i) Incorporated by reference to Exhibit 15 to Pre-Effective Amendment No.
1 to the Registration Statement on Form N-1A of Merrill Lynch Inflation
Protected Fund (File No. 333-110936), filed on January 22, 2004.
* To be provided by amendment.
Item 25. Marketing Arrangements.
See Exhibits (h)(1) and (2).
C-2
Item 26. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
Registration fees $3,485
Printing (other than stock certificates) $21,250
Legal fees and expenses $45,000
Accounting fees and expenses $6,000
Rating Agency Fees $55,000
Miscellaneous $4,265
---------------
Total $135,000
Item 27. Persons Controlled by or Under Common Control with Registrant.
The Registrant is not controlled by, or under common control with, any
person.
Item 28. Number of Holders of Securities.
Number of Record Holders
Title of Class At , 2004
--------------------------------------------- ------------------------
Common Stock, $.10 par value
Preferred Stock 1
Item 29. Indemnification.
Reference is made to Section 2-418 of the General Corporation Law of the
State of Maryland, Article V of the Registrant's Articles of Incorporation,
Article VI of the Registrant's By-laws and Section 6 of the Purchase
Agreement, which provide for indemnification.
Article VI of the By-laws provides that each officer and director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the Maryland General Corporation Law, except that such indemnity shall
not protect any such person against any liability to the Registrant or any
stockholder thereof to which such person would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his or her office. Absent a court
determination that an officer or director seeking indemnification was not
liable on the merits or guilty of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
or her office, the decision by the Registrant to indemnify such person must be
based upon the reasonable determination of independent legal counsel or the
vote of a majority of a quorum of non-party independent directors, after
review of the facts, that such officer or director is not guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
Each officer and director of the Registrant claiming indemnification
within the scope of Article VI of the By-laws shall be entitled to advances
from the Registrant for payment of the reasonable expenses incurred by him or
her in connection with proceedings to which he or she is a party in the manner
and to the full extent permitted under the Maryland General Corporation Law;
provided, however, that the person seeking indemnification shall provide to
the Registrant a written affirmation of his or her good faith belief that the
standard of conduct necessary for indemnification by the Registrant has been
met and a written undertaking to repay any such advance, if it ultimately
should be determined that the standard of conduct has not been met, and
provided further that at least one of the following additional conditions is
met: (i) the person seeking indemnification shall provide a security in form
and amount acceptable to the Registrant for his or her undertaking; (ii) the
Registrant is insured against losses arising by reason of the advance; or
(iii) a majority of a quorum of non-party independent directors, or
independent legal counsel in a written opinion shall determine, based on a
review of facts readily available to the Registrant at the time
C-3
the advance is proposed to be made, that there is reason to believe that the
person seeking indemnification will ultimately be found to be entitled to
indemnification.
The Registrant may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the Maryland General
Corporation Law from liability arising from his or her activities as officer
or director of the Registrant. The Registrant, however, may not purchase
insurance on behalf of any officer or director of the Registrant that protects
or purports to protect such person from liability to the Registrant or to its
stockholders to which such officer or director would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her office.
In Section 7 of the Purchase Agreement relating to the securities being
offered hereby, the Registrant agrees to indemnify Merrill Lynch and each
person, if any, who controls Merrill Lynch within the meaning of the
Securities Act of 1933 (the "1933 Act") against certain types of civil
liabilities arising in connection with the Registration Statement or
Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may
be provided to directors, officers and controlling persons of the Registrant
and Merrill Lynch, pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in connection with any successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
C-4
Item 30. Business and Other Connections of The Investment Adviser.
FAM, acts as the investment adviser for a number of affiliated open-end
and closed-end registered investment companies.
Merrill Lynch Investment Managers, L.P. ("MLIM"), acts as the investment
adviser for a number of affiliated open-end and closed-end registered
investment companies, and also acts as sub-adviser to certain other
portfolios.
The address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill
Lynch Funds for Institutions Series is One Financial Center, 23rd Floor,
Boston, Massachusetts 02111-2665.
The address of the Investment Adviser, MLIM, Princeton Services, Inc.
("Princeton Services") and Princeton Administrators, L.P. ("Princeton
Administrators") is also P.O. Box 9011, Princeton, New Jersey 08543-9011. The
address of Merrill Lynch and Merrill Lynch & Co., Inc. ("ML & Co.") is World
Financial Center, North Tower, 250 Vesey Street, New York, New York 10080. The
address of the Fund's transfer agent, The Bank of New York (the "Transfer
Agent"), is 101 Barclay Street, New York, New York 10286.
Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person or entity has
been engaged for the past two years for his, her or its own account or in the
capacity of director, officer, employee, partner or Director. Mr. Burke is
Vice President and Treasurer of all or substantially all of the investment
companies advised by FAM or its affiliates, and Mr. Doll is an officer of one
or more of such companies.
Other Substantial Business,
Position(s) with Investment Profession, Vocation
Name Adviser Or Employment
---------------------------- ------------------------------------------- -------------------------------------------------
ML & Co. Limited Partner Financial Services Holding
Company; Limited Partner of MLIM
Princeton Services General Partner General Partner of MLIM
Robert C. Doll, Jr. President President of MLIM; Director of
Princeton Services; Chief
Investment Officer of
OppenheimerFunds, Inc. in 1999
and Executive Vice President
thereof from 1991 to 1999
Donald C. Burke First Vice President and Treasurer; First Vice President, Treasurer and
Director of Taxation of MLIM Director of Taxation of MLIM;
Senior Vice President and Treasurer
of Princeton Services; Vice
President of FAMD
Andrew J. Donohue General Counsel First Vice President and General
Counsel of MLIM; Senior Vice
President, Director and General
Counsel of Princeton Services;
President of FAMD
C-5
Item 31. Location of Account and Records.
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act, and the Rules promulgated thereunder are
maintained at the offices of the Registrant (800 Scudders Mill Road,
Plainsboro, New Jersey 08536), its Investment Adviser (800 Scudders Mill Road,
Plainsboro, New Jersey 08536), its custodian and its Transfer Agent, The Bank
of New York (101 Barclay Street, New York, New York 10286), and its accounting
services provider, State Street (500 College Road East, Princeton, New Jersey
08540).
Item 32. Management Services.
Not applicable.
Item 33. Undertakings.
(1) The Registrant undertakes to suspend the offering of the shares of
preferred stock covered hereby until it amends its prospectus contained herein
if (1) subsequent to the effective date of this Registration Statement, its
net asset value per share of preferred stock declines more than 10% from its
net asset value per share of preferred stock as of the effective date of this
Registration Statement, or (2) its net asset value per share of preferred
stock increases to an amount greater than its net proceeds as stated in the
prospectus contained herein.
(2) Not applicable.
(3) Not applicable.
(4) Not applicable.
(5) The Registrant undertakes that:
(a) For purposes of determining any liability under the 1933 Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the registrant pursuant to Rule 497(h) under
the 1933 Act shall be deemed to be part of this Registration Statement as
of the time it was declared effective.
(b) For the purpose of determining any liability under the 1933 Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(c) The Registrant undertakes to send by first-class mail or other
means designed to ensure equally prompt delivery, within two business
days of receipt of a written or oral request, any statement of additional
information.
C-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Township of Plainsboro, and State of New
Jersey, on the 13th day of July, 2004.
MUNIYIELD NEW JERSEY FUND, INC.
(Registrant)
By: /s/ Donald C. Burke
----------------------------------
(Donald C. Burke, Vice President
and Treasurer)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following person in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Terry K. Glenn* President (Principal Executive
------------------------------------------------
(TERRY K. GLENN) Officer) and Director
Donald C. Burke* Vice President and Treasurer
--------------------------------------------------
(DONALD C. BURKE) (Principal Financial and
Accounting Officer)
James H. Bodurtha* Director
--------------------------------------------------
(JAMES H. BODURTHA)
Joe Grills* Director
------------------------------------------------
(JOE GRILLS)
Herbert I. London* Director
--------------------------------------------------
(HERBERT I. LONDON)
Andre F. Perold* Director
---------------------------------------------------
(ANDRE F. PEROLD)
Roberta C. Ramo* Director
-------------------------------------------------
(ROBERTA C. RAMO)
Robert S. Salomon, Jr.* Director
--------------------------------------------------
(ROBERT S. SALOMON, JR.)
Stephen B. Swensrud* Director
-----------------------------------------------
(STEPHEN B. SWENSRUD)
*By: /s/ Donald C. Burke July 13, 2004
-----------------------------------
(Donald C. Burke, Attorney-in-Fact)
C-7
POWER OF ATTORNEY
The undersigned, Terry K. Glenn, Donald C. Burke, James H. Bodurtha, Joe
Grills, Herbert I. London, Andre F. Perold, Roberta Cooper Ramo, Robert S.
Salomon, Jr. and Stephen B. Swensrud, the Directors/Trustees and the Officers
of each of the registered investment companies listed below, hereby authorize
Terry K. Glenn, Andrew J. Donohue, Donald C. Burke, Robert C. Doll, Jr. and
Phillip S. Gillespie or any of them, as attorney-in-fact, to sign on his or
her behalf in the capacities indicated any Registration Statement or amendment
thereto (including post-effective amendments) for each of the following
registered investment companies and to file the same, with all exhibits
thereto, with the Securities and Exchange Commission: Apex Municipal Fund,
Inc.; Corporate High Yield Fund, Inc.; Corporate High Yield Fund III, Inc.;
Corporate High Yield Fund V, Inc.; Corporate High Yield Fund VI, Inc.; Fund
Asset Management Master Trust; Master Focus Twenty Trust; Master Large Cap
Series Trust; Mercury Funds II; Merrill Lynch California Municipal Series
Trust; Merrill Lynch Focus Value Fund, Inc.; Merrill Lynch Fundamental Growth
Fund, Inc.; Merrill Lynch Investment Managers Funds, Inc.; Merrill Lynch Large
Cap Series Funds, Inc.; Merrill Lynch Multi-State Municipal Series Trust;
Merrill Lynch Retirement Reserves Money Fund of Merrill Lynch Retirement
Series Trust; Merrill Lynch Short Term U.S. Government Fund, Inc.; Merrill
Lynch U.S. Government Mortgage Fund; Merrill Lynch Variable Series Funds,
Inc.; Merrill Lynch World Income Fund, Inc.; MuniAssets Fund, Inc.;
MuniEnhanced Fund, Inc.; MuniHoldings California Insured Fund, Inc.;
MuniHoldings Insured Fund II, Inc.; MuniInsured Fund, Inc; MuniYield Arizona
Fund, Inc.; MuniYield California Fund, Inc.; MuniYield California Insured
Fund, Inc.; MuniYield Florida Fund; MuniYield Fund, Inc.; MuniYield Insured
Fund, Inc.; MuniYield Michigan Insured Fund II, Inc.; MuniYield New Jersey
Fund, Inc.; MuniYield New York Insured Fund, Inc.; MuniYield Quality Fund,
Inc.; MuniYield Quality Fund II, Inc.; Summit Cash Reserves Fund of Financial
Institutions Series Trust; and The Asset Program, Inc.
Dated: February 18, 2004
/s/ Terry K. Glenn /s/ Donald C. Burke
-------------------------------------------------------------- -------------------------------------------------------------
Terry K. Glenn Donald C. Burke
(President/Principal Executive (Vice President/Treasurer/Principal
Officer/Director/Trustee) Financial and Accounting Officer)
/s/ James H. Bodurtha /s/ Joe Grills
------------------------------------------------------------ ---------------------------------------------------------------
James H. Bodurtha Joe Grills
(Director/Trustee) (Director/Trustee)
/s/ Herbert I. London /s/ Andre F. Perold
------------------------------------------------------------- --------------------------------------------------------------
Herbert I. London Andre F. Perold
(Director/Trustee) (Director/Trustee)
/s/ Roberta Cooper Ramo /s/ Robert S. Salomon, Jr.
---------------------------------------------------------- ------------------------------------------------------------
Roberta Cooper Ramo Robert S. Salomon, Jr.
(Director/Trustee) (Director/Trustee)
/s/ Stephen B. Swensrud
-----------------------------------------------------------
Stephen B. Swensrud
(Director/Trustee)
Exhibit Index
(a)(2) Articles of Transfer.
(a)(7) Articles of Amendment to the Articles Supplementary of the
Series A and Series B AMPS, dated June 23, 1999.
(a)(8) Articles of Amendment to the Articles Supplementary, dated
July 9, 2004.
(a)(9) Form of Articles Supplementary creating the Series C AMPS.
(d)(2) Form of specimen certificate for the Series C AMPS.
(e) Form of Automatic Dividend Reinvestment Plan.
(h)(1) Form of Purchase Agreement between the Registrant and
Merrill Lynch, Pierce, Fenner & Smith Incorporated relating
to the AMPS.
(k)(4) Form of Auction Agent Agreement between the Registrant and
The Bank of New York.
(k)(6) Form of Letter of Representations.